3 Bottoming Growth Stocks to Buy After Tuesday’s Reversal

growth stocks - 3 Bottoming Growth Stocks to Buy After Tuesday’s Reversal

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Do you want a silver lining to the bloodbath transpiring in growth stocks? The faster they go down, the faster they find a bottom. Would you rather suffer through a year-long descent or a single quarter plunge that hacks 30% to 50% from their once lofty prices?

Personally, I prefer the latter. So bring on the blood in tech stocks and other high-fliers. At the end of the battle, bargains will be found.

But while we don’t know when the ultimate bottom will arrive, signs are cropping up that a bottom – be it short-term or long – could be here. I’m encouraged by the response to Tuesday’s nasty down gap in growth stocks. Rather than press their bets, sellers appeared exhausted, and compelling bullish reversal candles formed in many names.

I’ve gone hunting to find the best ones and present them below for your consideration:

  • Zoom Video Communications (NASDAQ:ZM)
  • Square (NYSE:SQ)
  • Crowdstrike Holdings (NASDAQ:CRWD)

After a closer inspection of each price chart, I’ll share my favorite options strategy for bottom fishing.

Growth Stocks to Buy: Zoom Video Communications (ZM)

Zoom Video Communications (ZM) stock is trying to bottom.

Source: The thinkorswim® platform from TD Ameritrade

The double-edged sword of momentum has been on full display in Zoom’s price chart. Ever since the tides turned in mid-October, we’ve seen a nasty dismantling of its uptrend and the gains that came with it. At Tuesday’s low, ZM was 54% off its highs. Despite the drubbing, Zoom has only returned to last August’s price level – which says something about just how insane the final stage of its moonshot was.

We now have a mature downtrend with prices trending beneath all major moving averages. Legions of bagholders remain ready and willing to part with their shares at higher prices. This will make it difficult for rallies to gain traction.

That said, I find Tuesday’s reversal characteristics tempting for a trade. The bullish engulfing candle was powerful and could indicate it’s time for a bounce. To capitalize, I like selling bull puts.

The Trade: Sell the June $240/$230 bull put for $1.50.

Square (SQ)

Square (SQ) stock chart with potential support bounce

Source: The thinkorswim® platform from TD Ameritrade

The damage in Square shares hasn’t been near as dramatic, but it still suffered during the recent fallout in growth stocks. At yesterday’s low, SQ was down 27% from its peak. We are seeing significant support develop near $200, which supports today’s contrarian bullish idea. Multiple pivot lows have formed in this zone. The 200-day moving average is also fast approaching to act as a potential catalyst for fresh buyers.

Tack on the short-term oversold posture of the stock and yesterday’s robust reversal candle, and the case for selling put spreads is strong.

I like credit spreads here for two reasons. First, they provide a high probability of profit due to their wide profit ranges. That gives us some margin of error in case these stocks get slippery while trying to bottom. Second, the recent bump in implied volatility has inflated the cost of puts, increasing the potential payday for this strategy.

The Trade: Sell the June $180/$175 bull put spread for 65 cents.

Growth Stocks to Buy: Crowdstrike Holdings (CRWD)

Crowdstrike Holdings (CRWD) with potential support bounce

Source: The thinkorswim® platform from TD Ameritrade

Crowdstrike rounds out our list of growth stocks with a pattern that mirrors its predecessor. The similarities mean every argument I just laid out for Square applies to CRWD. The only difference is the price, but even then, they’re not far off. For CRWD stock, I’m eyeing the $175 zone as support. Its 200-day moving average also looms closely beneath.

For a trigger, I do like waiting until we break above Tuesday’s high to signal a continuation to the rally that began yesterday. Thus far, on Wednesday morning, growth stocks, and the market as a whole, look sluggish. Here’s the position I’m eyeing for CRWD.

The Trade: Sell the June $160/$155 bull put for 80 cents.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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