Security software stocks were an early group to show strength in the latest rally. But earnings produced challenges. Zscaler saw a nice swing trading setup, but looming earnings got in the way of holding for longer. Here's why we bought, and eventually sold ZS stock.
What Made ZS Stock Attractive?
Market indexes formed a three-waves-down pattern into the fall this year. You can see the Nasdaq 100 made a low on Aug. 18, Sept. 27 and Oct. 26. How does this help with finding stocks? Look for the stocks that don't make new lows with the indexes.
Take the September low for ZS stock (1). For starters, it was higher than its August low. That made it a good buy candidate that was confirmed on the Oct. 6 follow-through day with a soaring relative strength line (2).
But when the market rally got in trouble, so did Zscaler stock (3).
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What about this latest rally? The lows on ZS stock (4) were again higher than the previous lows. A couple days after the Nov. 1 follow-through day, Zscaler was on the move again as it broke above a short downtrend (5).
It closed above all its moving average lines. The relative strength line wasn't at highs, but you could easily imagine it getting there along with the price. Enough factors were in its favor that we added ZS stock to SwingTrader that day.
Selling Into Strength
It wasn't long before we had a 2.5% gain in ZS stock and we took off our first third into the strength (6). Not only did it go higher that day but it also hit a 5% gain from our entry the next day (7). Interestingly, the relative strength line was getting to new highs just ahead of the price.
At this point, Zscaler stock was trending above its 5-day moving average, so we continued to hold it while it held the line.
So why did we exit on Nov. 24, even though we were still above the 5-day line (8)? Earnings.
As a rule, we don't hold through earnings because the risks of outsize moves are too high. ZS stock provided yet another example.
Even during normal trading hours, the 4% drop might have been too much for us to handle (9). Especially with a stock that's run up so much. ZS stock was down even more in after-hours trading with more than a 7% plunge. While the recovery was swift and powerful, it does you little good if you get shaken out near the lows.
But that's with a short-term time frame. It's worth noting that ZS stock was also a member of our Leaderboard product at the same time. Leaderboard takes a longer-term approach. It had a position in Zscaler stock from September and used a decisive close below its 10-week line as a sell signal. Since that never triggered and it had a 20% cushion ahead of earnings, it was an easy hold for Leaderboard. It goes to show how important your time-frame and risk tolerance is for building your personal investing strategy.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
