Playbook: A Tech Stock Prone to Big Moves

ZS has formed a basing pattern since May and could be ready for a correction to the upside

CFA, Senior Market Strategist
Sep 20, 2022 at 9:00 AM
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The below is an excerpt from this past Monday's episode of Schaeffer's Playbook of the Week, featuring Schaeffer's Senior Market Strategist Bryan Sapp, CFA. Below, Bryan makes a short -- and possibly longer -- term bullish case for Zscaler Inc. (NASDAQ:ZS).

Let me start by saying this is a risky trade. I’m playing off the potential we get a selloff today or tomorrow and a turnaround into the Fed decision. That’s good to tech stocks like ZS that are rate sensitive. But the equity also doesn’t need the market to rally on the Fed, there are some things in place the stock has working for it here and now.

You’ll see ZS is a big underperformer year-to-date, down roughly 50%. However, there are some signs of life. The shares have been basing out since May, making a series of higher lows since May. While ZS has yet to have an upside moment with buyers getting exuberant, but it hasn’t sustained anything to the downside either.

Maybe sellers are done for a little while and that gives bulls chance to take the ball and run with it. The company reported earnings a week and a half ago, and they were a blowout. There was fear this cloud security was bloated and overdone, but Zscaler beat on revenue and beat on earnings. They raised full-year guidance for 2023. There was nothing negative from the report. Since then, the stock moved up on the earnings day and one day of follow through. But the market has dragged ZS lower since then; it was at $194 six days ago and went down to $165 on Friday.

Big sellers have emerged, but there’s a potential small spot to trade against. You can risk very little, and it could turn into a much bigger trade on the upside. Per the chart below, I’m looking at the 50-day moving average, which closed around $163. ZS also rallied into the close on Friday, so that shows buyers are interested here and now.

ZS PLBK

The stock has formed a bull flag pattern since earnings, with the big impulsive move higher on the news, then consolidation lower on decreasing volume. There's also 7% short interest, so it remains highly shorted and the event we get any sort of good news this week, you have some squeeze potential. Options are reasonably priced, with ZS' Schaeffer's Volatility Index (SVI) checking in at the 34th percentile. They were expensive ahead of earnings, but post-earnings that volatility crush made their prices pretty attractive for both a stock and an option trade.

Longer term, this is a company we’re going to look at in five or 10 years as one of the leaders and gainers. It’s an emergent industry that’s not even close to maturity.

ZS’s 14-day Relative Strength Index (RSI) remains above 50, something I like to key on with corrections. Overall, the stock has made some huge moves in a short period of time this year, and its worth taking a shot for a reversal to continue that earnings momentum.

Join Schaeffer's Playbook of the Week now and tune in every Monday morning at 8:30 a.m. to get ready for the trading week with me. Click here for more information to get started.

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