There is a difference between investing and trading. Zynga (NASDAQ:ZNGA) is a stock I can only trade. This is nothing against the company or its prospects, but for years, ZNGA has been in a downtrend. Now that it has had a strong rally, I can’t just trust it but I can trade it.
To invest in a company, I need value behind which I can formulate my trades. Entry points are extremely important and with ZNGA stock I don’t have many here. I don’t have an inside edge, so I lack conviction.
Obviously, the ZNGA stock bulls feel differently. The stock is up 28% this year and 41% in 12 months. Clearly, it has momentum and it’s beating the S&P 500 by a wide margin. But still and against this out-performance, I cannot invest in it for the long term.
Those who have been long it since the highs of 2014, it has taken them almost five years to get their money back and they are likely to get out at these altitudes. No, there won’t be a bell to tell everyone to sell it, but if I were long the stock I’d book and thank the investing Gods for the opportunity.
This is not to say that ZNGA is not a tradable stock. Its price action is similar to Advanced Micro Devices (NASDAQ:AMD) or Chipotle (NYSE:CMG). These are now momentum stocks rising against a slew of tides.
Valuation is one of those tides and ZNGA is not cheap. It sells at a 280 price-to-earnings ratio. This is three times more expensive than Amazon (NASDAQ:AMZN). In fact, ZNGA’s P/E is equal to AMZN, CMG and Netflix (NASDAQ:NFLX) combined. I am sure experts of the stock could argue this point, but it probably won’t change my mind and it doesn’t for the short-term trading.
How to Trade ZNGA Stock
In the lower time frames, ZNGA’s trading pattern is a rising wedge. Those need to hold the lower trend line or else they breakdown in measured moves.
The stock gapped up earlier this month and rallied 14% on the back of the recent earnings. Clearly Wall Street liked what they saw, even at a time when the gaming industry is in a tumultuous period. It also helped that ZNGA got a price target upgrade from Wedbush that day.
Traders often chase the power of round numbers. In this case, Zinga stock is above $5 and it now becomes a neckline it must hold for short-term momentum. On Feb. 15, there was a 30 minute doji candle that served as the breakout to $5.15. Now it becomes the short-term floor it must hold.
This would be the first exit point to active traders. Otherwise, the stock will retest $4.85 per share. Should that happen and should ZNGA struggle there too, there is another mini support zone at $4.70 per share and that is close enough to the open earnings gap that it would probably fill.
At that point, those who missed the earnings rally can enter for a chance to take the ride back up to $5 or higher. This is where the homework comes in. When I don’t have value to use for support, then I need to really know what I am trading to decide how stubborn I become with my trade. I need a reason to chase and more importantly need a well-defined stop out level. I don’t want to turn a trade into an investment.
ZNGA stock will need the help of the general markets. We are so close to very important deadlines from tariffs and political shenanigans that adds a vegas flare to all short-term trading. If we get a favorable headline, then minute levels like these won’t matter much; the stock would be caught in the market-wide wave.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.