St. Jude Medical Inc. makes, as the name indicates, a whole range of medical devices particularly with regard to cardiovascular applications. On that account the future should be bright. However the fellows/girls over at Muddy Waters think otherwise. Their concern seems to have something to do with hacking, to be more precise some form of electronic interference with their pacemakers and other implants, but whatever the rational, the main point is that they think this thing is overvalued. Is it?

On the left we have a chart by Google going back all the way to 1978, roughly an investor’s lifetime. We think there are 5 waves up even if we are open to slightly different subdivisions in this count. A confirming aspect is that wave 5 is equal to waves 1 and 3 combined in terms of total travel, a common occurrence. In the more detailed chart on the right there is, potentially, a fairly uncommon, expanding triangle 4th wave ( not to be confused with the Jaws of death pattern that, IMO, does not exist). Note also that both the RSI and MACD have recently fallen out of bed. In short we wholeheartedly agree with Muddy Water’s opinion on this stock, albeit for different reasons. Our target is first the low of the triangle at about $50, and then the low point of wave 4 at just under $30.

For complete disclosure we note that this is not the first time that we cover this stock. Last time was in 2012 when we got it completely wrong.

The then (July 6th, 2012 and earlier) and now charts;

At the time there were two distinct possibilities, the purple one where the stock would go down immediately or the green one where much of wave c of wave 2 still had to develop. QEs and other simulative measures no doubt contributed to the more time consuming second option. Today we got down to almost $30 ($12 below the level in June). This looks like a third wave that may have quite a bit more to go. Apparently an FDA report was released revealing that certain cables could easily fray and jeopardize the proper functioning of a heart device. Sounds innocent enough. Going lower!

St. Jude is following the EW script quite conscientiously (see previous blogs). Ultimately we are looking for a low of $24 or less. For the moment two scenarios present themselves as plausible. The green one is initially fairly bullish which is why I would prefer the purple one by a large margin.

Comments from July and October last year, see previous blogs.

The stock did exactly that. The low was at $33.54. My (educated) guess is that the first wave is complete and that we are doing 2 right now. This wave 2 could, repeat could, continue to say $44, the apex of a triangle. I am sure some of you will think that this count cannot be correct as wave 3 looks to be the shortest. However if you look carefully it will become clear that it is indeed the longest. Stay out! By the way, the p/e is still well above 30 according to Bigcharts.

The target of “say” $44, made 4 months earlier was , of course, wrong by $0.26. That really makes you wonder if EW works. Next is wave 3 down to below $25.