Shares of cyber security stocks such as FireEye Inc (NASDAQ:FEYE) and Palo Alto Networks Inc (NYSE:PANW) rallied on Thursday and now look promising to make a next leg higher. Both of those stocks saw meaningful post-earnings up-gaps and rallies in May/early June and as a result then consolidated in recent weeks.
When I last offered my thoughts on shares of FireEye stock on May 8, I highlighted that the stock’s post-earnings rally was likely one to respect and that the stock, after some near-term consolidation, may see upside toward $18. So far my playbook is working out, and while the stock is still in consolidation, a next leg higher looks to be in the cards soon.
At this point, allow me to circle the importance of respecting and contextualizing gaps in stocks. Not all gaps are created equal and certainly not all gaps fill. There is a major misconception among market participants that all gaps in stocks ultimately fill. By my estimate only about 75% of gaps ultimately fill, and one must distinguish between so-called “breakaway gaps” that come on the back of meaningful news such as earnings reports and “common gaps” that usually have lesser technical significance through a multiweek/month lens.
FEYE Stock Charts
Speaking of breakaway gaps, that’s exactly what FEYE stock did both on a daily and weekly closing basis after its latest earnings report.
On the weekly chart above, note that following this earnings report, the weekly chart registered a powerful breakout past diagonal resistance and out of the wedge formation (black lines) as well as right through its yellow 50-week simple moving average.
On the daily chart, the breakaway gap is more visible. Here we see that the recent rally gapped the stock right above its red 200-day moving average and past a layer of resistance around the $12.80-$13.50 area. In short, this is not the type of up-gap that one wants to fight, but rather one that is to be respected.
Following this up-gap FEYE stock rallied for another 10 days but ultimately exhausted itself and fell into a constructive sideways consolidation move. This consolidation range now has well defined support around $14.60 and any daily close back above the $16 in my eye could trigger a next leg higher and thus a continuation of the rally. If and when this next breakout occurs, a next upside target through a multiweek/month lens becomes the $18 area while any meaningful bearish reversal serves as a stop-loss signal.
Check out Anthony Mirhaydari’s Daily Market Outlook for June 23.
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