What happens when a stock rises nearly 400% in a single quarter and then fails to deliver a perfect quarterly report? It gets smashed. Such is the tale of the hottest new cloud computing company on the Street, Fastly (NYSE:FSLY). After its fourth straight losing session on Monday, Fastly stock is down 32% peak-to-trough.
The correction following the Aug. 5 earnings disappointment delivered a rude awakening to complacent shareholders and proved the peril of holding high-multiple momentum stocks into earning announcements.
If you believe in the long-term fundamentals of the growth story that has driven Fastly to the moon, then there’s no doubt the current dip will ultimately be a buying opportunity. The challenge, as ever, lies in the timing.
Was 32% enough of a haircut to eliminate the excess, or do we need to further plumb the depths before equilibrium and a more reasonable valuation is found? I suspect the answer is closer to the latter, but fortunately, you don’t have to forecast these things ahead of time. Instead, we can wait for the price chart to provide evidence that buyers are returning, and that the uptrend is taking root.
Let’s take a closer look at the price chart to identify which price levels to focus on.
FSLY Stock Charts
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Though Fastly has only been around for a little over a year, its weekly chart provides a simplified look at its fantastic story thus far. From May 2019 to May 2020, the stock attempted to find its public footing by carving out a range between $10 and $30. While prices were rangebound, earnings were incrementally improving. As is often the case, the trend of its quarterly earnings numbers proved more important than the actual dollar amounts. Including this month’s report, here is the progression of its earnings per share: 16-cent loss, 13-cent loss, 10-cent loss, 6-cent loss, 2-cent profit.
May’s report of a 6-cent loss finally served as the catalyst to launch Fastly shares from their base, sparking the insane run that we’ve seen over the past three months. The ascent was mostly a straight shot higher. A single weekly pullback carved out a support pivot at $75.
FSLY stock’s post-earnings nose dive matched the speed of its climb. Losing 32% over a few trading sessions is no small feat. Incredibly, all the drop has done is return Fastly to its otherwise rising 50-day moving average. Though the short-term trend has taken a hit, the intermediate-term uptrend remains intact. We’ve returned to the scene of the previously mentioned support zone at $75.
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If buyers want to keep the bullish bias alive, then they’d better defend this level. Because of the pace of last quarter’s ascent, there aren’t any support areas below $75 until you get to $50. That leaves a lot of potential downside if the $75 floor doesn’t hold.
Trade Ideas
I’m a fan of anticipating all potential scenarios. The current disposition of FSLY stock offers an interesting, and potentially profitable, example of putting this practice into action.
The most bullish outcome would be a successful defense of $75, followed by a rally higher. The beautiful thing about buying here is you can use a tight stop loss if the recovery bid fails. I’d wait for a break of intraday resistance or Monday’s high before pulling the trigger, though. My strategy of choice would be buying Oct bull call spreads, such as the $90/$100.
A second scenario we could see is an overshoot of the $75 support level, bringing deeper oversold conditions into play. This would create a more compelling setup to sell credit spreads into. I like the Sep $55/50 bull puts.
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