The effects of the coronavirus on the world have been tragic. Almost 40 million have had it, and more than one million have lost their lives from its complications. In addition, millions are still out of work as global economies deal with the decimation. From a business perspective, though, thousands of companies are benefiting from huge boosts to their incomes. The quarantine kicked the digitization trend into an high gear. Companies that operate in cyberspace are experiencing a sharp spike in demand. Fastly (NYSE:FSLY) is one of them, so it’s not a surprise to see Fastly stock up 375% year to date.
In early September, when the stock was close to $100 per share I wrote that the bulls were in charge of it. At that time, the cloud cohort was riding high off the massive spike that Zoom (NASDAQ:ZM) off its earnings. Shortly thereafter, FSLY stock fell 25% to $72 per share.
Even though the timing of my article was not ideal, the price action now proves the point I made (more on this later). As soon as it hit the support levels, the buyers stepped in with force. Fastly fell nearly 40% in August from a disappointing earnings report. That established a floor — and it served as the bounce level this time.
Preparing a Plan Makes Trading FSLY Stock Simple
In anticipation of such action, in my earlier write up I laid out the perfect trading plan. “Buy the breakout above $100 or by the dip closer to $80 per share.” If one followed through and bought the lowest close during the correction, they would have profited 30%.
Therefore, I will repeat the message today that the dips in FSLY stock are opportunities. It is important to find the right levels that fit each investor’s time frame, but the strategy is the same. Setbacks are temporary, and without a management mistake it is headed higher. This will remain true for as long as this is a bull market.
This stock moves fast, so it is easy for doubt to creep in during a fast rally. The global online trend has a lot of life in it, so I expect Fastly to sustain that edge for a while. Bears who short it just because it’s “gone too far too fast” will have a tough time ahead.
The Bullish Thesis Is Here to Stay
This sounds easy, but it is not. Eventually, not every company that serves the cloud will be a winner. But it is hard to separate the losers so early in the process. Meaning the FSLY stock will have the benefit of the doubt until proof of failure. Until then, the bulls will buy the dips every chance they get.
There are levels to note in this battle between bulls and bears. I expect them to fight tooth and nail over the $100 zone. If the bulls prevail, they get a shot at setting new records.
Conversely if the bears have their way, FSLY stock could fade below $85. There I expect the defensive line will hold the bears and the stock will bounce. The really big prize for the sellers is if they can breach below $72 per share. The stock would then be in danger of falling another $15 from there. This is definitely not my scenario but it does exist in some weird combination of events.
There Are Outside Factors to Consider
The bottom line is simple. The bulls have support below so they also have the opportunity to extend their gains. The stock is in a set range and a breach of either sides will have momentum in that direction.
These are turbulent times, especially since the U.S. is going into a very contentious presidential election. To complicate matters, last week we found out that President Trump has tested positive for Covid-19. All kinds of rumors and conspiracy theories are adding to the uncertainties. Nevertheless stocks rose on Monday in a big way when news came out that President Trump seems to be handling Covid-19 well.
Investors can mitigate some of the headline risk by using options. There they can go long Fastly stock without actually buying shares. In my September article I suggested selling the $70 Oct put. That would have delivered the profits without a sweat even after the dip.
I can rinse and repeat by selling the Dec $65 put through their next earnings report. The stock can fall more than 30% and this still would still win.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.