DocuSign (NASDAQ:DOCU) is finally showing signs of slowing after a 165% increase year-to-date. It was bound to happen eventually, as rock star growth stocks can’t even rise forever. That said, we’ll explore the two culprits for the trajectory shift in this article. And while I wouldn’t abandon the bull case for DocuSign stock altogether, the price chart demands lowering expectations.
In the aftermath of the novel coronavirus, DocuSign has emerged as a massive winner. The twin trends of social distancing and working from home have dramatically increased demand for the company’s services. At its peak earlier this month, shares of the San Francisco-based company were up nearly 187% YTD. This compares to the Nasdaq Composite, which was only up about 18%. So no matter how you spin it, that is some serious outperformance.
That said, we’ve seen evidence of a slowdown in the price chart of DOCU — and it warrants further investigation. Let’s dive in.
DocuSign Stock Slows
Trend analysis is all about the relationship between pivots. If they’re getting higher, then the trend is up. And if they’re getting lower, then the trend is down. Since the March low, we saw quite the impressive streak of progressively higher peaks. It continued uninterrupted through June’s earnings announcement and beyond.
However, last week the domination finally ended. And with the rollover into the weekend, the stock officially formed a lower pivot high.
The lack of company-specific news to blame suggests the weakness was born of broad market weakness and a desire for profit-taking. After leading for months, the technology sector finally started to lag. The Nasdaq Composite put in a potential double top pattern that created its first close below the rising 20-day moving average since April. And with sentiment souring in tech, traders decided to ring the register in DOCU. Friday also marked DocuSign stock’s first breach of its 20-day since early-April.
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Rather than turning aggressively bearish, however, I suggest a more modest shift in expectations. A lower pivot high is a negative development — but until we take out support, the trend hasn’t fully turned lower. This could be the stock transitioning to a more neutral posture, and some consolidation wouldn’t be a bad thing.
Overall, the price has risen a monster amount in a short period. That said, sustainable trends require some backing-and-filling along the way to create more sustainable ascents. Stocks that run too far, too fast ultimately experience nastier corrections than those that build out more stable, methodical climbs.
But Don’t Count Out Bulls Just Yet
Two more signs leave me upbeat. First, the entire market rallied back powerfully on Monday, and it was led by technology stocks. The rebound pushed the Powershares QQQ Trust (NASDAQ:QQQ) back above its 20-day moving average, and DocuSign stock followed suit. That leaves the $185 support level intact, and a breakdown off the table for now.
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Second, the volume during last week’s DOCU downturn was minimal. Far from death-dealing distribution, the selling pressure seemed more like run-the-mill register-ringing. I’m open to the idea of the sideways range, giving way to a more substantial correction. However, it would take a higher volume breach of $185 to shift me into the bear camp.
Buying calls and call spreads has been mighty profitable over the past four months. But if last week’s lower pivot high is any indication, it could be worth using less aggressive bullish trades for now. That said, bull put spreads fit the bill, as they offer a higher probability of profit and will generate gains even if DOCU treads water.
The Trade: Sell the Aug. $170/$165 bull put for around 70 cents.
You will capture the max gain of 70 cents if the stock sits above $170 at expiration. The max loss is $4.30 and will be forfeited if the stock falls below $165.
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