When it comes to profit potential for rallies in the market, not all stocks are created equal. Invariably there are the big winners that make the difference in your portfolio and everything else. So what makes ZS stock look like it might be a big winner? Relative strength tells the story.
Swing Trading Example: ZS Stock
Zscaler is among the stocks that immediately stuck out on the recent follow-through day. But going back just a couple months shows why it deserved a prime spot on watch lists.
On the Aug. 29 follow-through day (1), ZS stock was still stuck below its 50-day moving average line. But within a few days it powered higher and was nearly at highs for 2023. Even more powerful was the relative strength line leading into recent new high ground ahead of the price (2).
Time and time again, the relative strength line proves to be a meaningful tell of future leaders.
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That particular rally soon fizzled out as the weight of higher treasury yields squelched growth stocks. It's an important reminder that not every follow-through day works. Soon enough, ZS stock found itself back below its 50-day line along with the major market indexes (3). But there was a big difference.
The market indexes undercut their follow-through day lows as well as their Aug. 18 lows. ZS stock didn't. That's another factor of relative strength when a stock refuses to give up ground.
With that back drop, we added Zscaler stock to SwingTrader as soon as it broke its recent downtrend (4). Even though it was a poor close in the range, the price still gained over 3% while volume picked up from the prior three weeks. And the relative strength line? It was poised to clear recent highs well before the price.
Remaining Flexible
That's exactly what happen the next day (5). ZS stock jumped another 3% and the relative strength line broke into recent highs ahead of the price. As strong as it was, we still took off a third of the position just to lock in some profits on strength. It was a good thing we did.
The following day Zscaler got knocked down nearly 6%, quickly wiping away all our profits (6). While it was right at the 50-day line, we couldn't afford to let it go too much. Especially with the heightened volatility. So we kept the loss small and exited.
Things did get worse for Zscaler after our exit but it did hold the 50-day line. Then when another follow-through day struck on Oct. 6, Zscaler along with many other software security stocks were the first ones out of the gate (7). Here again many of the indexes breached their recent lows whereas ZS stock didn't. And the relative strength punched through to highs ahead of the price again.
That made ZS stock worth picking up again. In our case, we ended up switching to group mate Palo Alto Networks. Why? It had the same characteristics of strong relative strength plus even more tightness to make the chart look more attractive. So far, PANW stock is one of our best positions acting in a similar fashion as ZS stock. With the market pulling back again, these stocks might not end up working out this time. But if you keep on looking at the relative strength clues, you'll eventually find an explosive winner.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
