The biggest surprise in 2020 is that Wall Street came out of quarantine with a voracious appetite for high-risk stocks. And CrowdStrike (NASDAQ:CRWD) is one of the clear winners when it comes to this trend. CRWD stock has rallied 270% in just over three months.
The novel coronavirus kicked secular digitization trends into ultra-high-gear, similar to the dot com phenomenon of yesteryear. The shutdown of physical spaces caused a panicked rush into the online world.
But this time it’s cloud stocks that are the focus of the buying frenzy.
Like all good things, this rally may be coming to a slow crawl. It’s not going to end because the digital revolution is not going to revert back to analog. Demand for these products and services will remain high, so dips that will be buying opportunities.
The trick is to know the appropriate time frames and the corresponding entry levels into these momentum stocks. They move fast in both directions and catching them on the way down is hazardous.
CRWD Stock is Falling But it Has Support
CrowdStrike stock experienced some heavy selling the past few days, accounting for a 20% decline. By definition, investors consider this to be a full recession. The good news is that this isn’t a CRWD-specific problem; the whole cohort, even Zoom Video (NASDAQ:ZM) and Twilio (NYSE:TWLO), has suffered just the same. The rally was fierce on the way up, so it is natural that the corrections would appear scary.
Yesterday CRWD stock lost an important level, which may have already triggered another leg lower towards $80 per share. There is another support zone near $89, but that’s not guaranteed to hold if the selling persists.
This is nothing against the company itself, but rather about the technical patterns on the chart that may have triggered. When the bulls lose a prior bounce area, the bears tend to overshoot a bit. This is normal price action and shouldn’t cause panic. The moves are more dramatic in frothy stocks and CRWD’s 45 times price-to-sales ratio means it has a lot of fat to trim.
Migrating to the cloud was trendy even before the quarantine. Now it’s turned into a necessity and the whole planet is in a race to get to it. This is true for companies and people alike. Salesforce.com (NYSE:CRM) created the idea years ago and Amazon (NASDAQ:AMZN) made it ubiquitous. The rest of the big tech companies are chasing AWS, so there’s plenty of business for everyone in the sector to prosper, including CRWD.
There are Good Reasons to Catch the Falling Knife
The future makes for an ideal setting for CrowdStrike, so the hoopla over CRWD stock is warranted. However, the burst that unfolded on Wall Street was unusual price action and needed to correct itself. If a stock rises so fast for so long it creates a very sharp rising wedge, which means it is susceptible to steep corrections without notice.
For long-term investors, finding an entry point here is easy, as a 20% dip is definitely an appropriate time to add stock. But short-term traders need to be more picky because they need to know the potential downside targets of this breakdown. Jumping in with both feet here may result in immediate losses.
The first correction in CrowdStrike came on July 15 and was greater than 15%. Luckily the bulls found footing and recovered almost all of it. This here is the second dip and and it is slightly bigger and deeper than last month’s. So it’s possible that the bears extend the sell of to $80 per share.
This is not a given, because the stock has support above $90. Tuesday’s wick is proof that the bulls are trying hard. In the event they lose it on another push lower, CRWD has a major pivot near $74 per share. I am not calling for it to collapse all the way down to that level, but if by chance it does it would be a place to buy in size.
Go Long CRWD Stock and Leave Plenty of Room for Error
To that effect we can implement an options strategy today. An investor can sell the October $70 put and collect $2.20 for it. This would provide them the opportunity to buy those shares at $70 should the stock falls below that level. Otherwise the trade would have created income out of thin air.
This means going long CrowdStrike stock now and leaving another 28% buffer from here. Buying a falling machete like this without understanding the levels is risky, especially when the overall markets are at all-time highs. I’m always uneasy chasing stock prices when we are setting records without specific triggers. And in this case the stock price action in CRWD stock does not show a specific upside trigger, but rather the availability of support.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
