Today I’m going to walk you through the process of how I think about a trade and an opportunity to profit.
But this is one where I have more questions than answers. And that’s when I turn to friends for additional guidance.
Let me explain.
I’m sure you’re aware of the complete collapse of UnitedHealth (UNH) stock.
Back in the fourth quarter of 2024, UNH was riding high. It was the largest component of the Dow Jones Industrial Average, the world’s most important stock market index.
Since then, the stock has tumbled more than 60%, losing about $350 billion in market cap in less than 10 months.
They even murdered the CEO in broad daylight in New York City.
Things are bad over there.
The Elliott Wave Principle
I’ll be first to tell you I’m not an “Elliottician.”
But, as a Chartered Market Technician and someone who’s studied Technical Analysis every day for 20 years, I have a good understanding of the basic principles of Elliott Wave Theory.
I encourage you to learn more about these concepts if you’d like. For today, just know that major trends tend to come in five waves, three waves in the direction of the trend (Waves 1, 3, and 5) and two corrective waves (Waves 2 and 4).
When you look at the Global Financial Crisis, for example, it was a perfectly clear five waves down, from October 2007 to the final lows of Wave 5 in March 2009.
Although I don’t purposely look for waves and count them along the way, it’s impossible for me not to see these five waves down in UnitedHealth:
There’s your first wave down to end 2024 and start the new year, then the bounce in the spring, followed by the large Wave 3 decline. (An extended Wave 3 is a classic characteristic of major trends.)
And you can see that bounce attempt in June, then the (potentially) final rollover into Wave 5.
This would be a classic end to a historic collapse, before a recovery can begin.
I’m not an Elliottician, but how can I not see that?
So I picked up the phone and called my buddy Bart.
James Bartelloni is the guy who first taught me about the Elliott Wave Theory 20 years ago. There are some very specific rules when it comes to wave counting, so I wanted to make sure I didn’t break any of them.
“Bart, how’s my count look?”
Retracement From 1987 Crash Lows
“JC, can’t argue with the count, valid on all accounts.”
Bart then pointed out that the current levels for UNH are at exactly the 61.8% retracement from the entire move off the lows from the 1987 crash!
“Bart, are you serious?”
“Go look at the chart. I can’t make this stuff up.”
This is the chart Bart is talking about:
If you start at the low from the 1987 crash, a few years after UNH’s IPO, and take it all the way up to the all-time highs from November, the current price is exactly a 61.8% retracement of that entire move.
Here’s a look at the same chart but using an arithmetic scale for a better view of this massive retracement and the corresponding levels:
Do you see why I call my friends? More eyes on the market.
I swear I never would’ve caught this.
Call Options Sean
OK, so we see a potentially completed five-wave count in what used to be the biggest stock in the Dow.
We have potential support here from the 61.8% retracement of the entire move off the 1987 crash.
So much potential here.
Let’s call Sean — my go-to options guy, especially when it comes to special situations.
We’re not just buying a base breakout here. This is an enormous stock that can’t stop crashing.
“Let me guess JC — you want to buy this one?”
“Hell yeah… What are you thinking, bull-call spread?”, I asked him.
I figured he’d tell me volatility is too expensive, so if we’re going to buy call options in UNH we probably need to sell some further out-of-the-money calls to help finance the trade.
Instead of forking over all that loot to buy expensive calls, we can sell some that are way out-of-the-money so it’s less cash out of pocket.
That’s what I thought.
And I was wrong.
“Dude, just buy the common stock. It even pays you a dividend.” It’s 3.5%, as it turns out.
Sean, my go-to options guy, is telling me to buy the common…
“Or you can buy LEAPS.”
“LEAPS” are options contracts that don’t expire until more than a year out.
Sean actually suggested the December 2027 expiration, which would give us almost two and half years for this trade to work out.
The Execution
I think everybody’s wrong about UNH and the selling has gotten out of control.
But, as I learned it, “bottom fishing can be very hazardous to your wealth.”
It’s not something we do too often.
So if you’re going to fight a trend, there are rules.
- You better have a good reason.
- You better have detailed risk-management procedures
- There better not be better opportunities elsewhere.
That’s how I think about trades when I’m in a situation like this.
I think about it a lot. I talk to some of my smartest friends, in this case Bart for the wave counts and Fibonacci, then Sean for the options side of things.
There are some good lessons, whether I put this trade on or not, whether it works or not.
It’s the process. It’s the network. It’s the idea flow. That’s the biggest value I get from all this.
You can buy the stock here, or an option, or even LEAPS, and you can stop out at the recent lows.
Or you can buy the strength. In other words, if prices are above the Wave 3 lows near $350, then you can own it against those lows, increasing your probability of success.
There’s no one way to do this.
There are plenty of wrong ways – starting with not managing risk and being reckless with position sizing.
But there are plenty of right ways to get this one done.
I hope this sheds some light on the way I think and how I use my network to help me with situations like this.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs