Zoom Video Communications (NASDAQ:ZM) capitalized on the new social trends sparked by the pandemic. And the ZM stock share price reflected the good fortune.
But, as is often the case, the optimism carried valuations to unsustainable heights, and a painful but necessary repricing ensued.
The sizable volatility we’ve seen over the past six months has been the market’s way of discovering a more sustainable level for ZM stock.
And, if recent price action is any indication, a low has been found, and buyers are returning. Indeed, a healthy uptrend is finally here. Short of a quick burst of upside earlier in the year, this is the best ZM stock has looked for 2021. So today, we’re taking a closer look at the reversal and mapping out where the stock may go next.
Growth Awakens
If you’re looking for a catalyst to Zoom’s subtle bullish turnabout, cast your eyes on the growth complex.
You could use the Nasdaq index, but I personally prefer the Ark Innovation ETF (NYSEARCA:ARKK) as my go-to proxy for the space. The Nasdaq is dominated by mega-caps like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN). In contrast, ARKK counts many small-cap, momentum stocks among its holdings. They’re more speculative and thus better representative of investors’ risk appetite.
Simply put, when ARKK is trending higher, it acts as a green light for bullish plays in companies like Zoom. The Nasdaq hitting a new record this week certainly helps, but ARKK’s awakening throughout June is the most important development. Admittedly, prices retreating Friday, but the rest is a welcome development after running for six straight sessions to a fresh six-week high.
ZM Stock Charts
Since larger time frames trump smaller ones, let’s start with the weekly view. ZM just rallied for six straight weeks, marking its best bullish streak since its downtrend began last year. Along the way, it pushed back above both the 20-week and 50-week moving averages. Unfortunately, we haven’t fully cleared the 50-week, and we’re seeing some supply enter the marketplace.
Bears will point toward the upper trendline of the descending channel as a reason to temper our enthusiasm. They’re not wrong, and this is a logical spot for ZM to consolidate and digest its recent gains. Ideally, prices will pause up here as opposed to suffering a deep retracement. A breakout over the trendline (call it $382) is the next tradable pattern for those playing off the weekly chart.
Turning to the daily chart reveals just how significant the past six weeks of rallying have been. The gains have been sufficient to turn the 20-day and 50-day moving averages higher. Moreover, both are headed northbound for the first time since last October. Given the strength during the last daily advance, I’d be eyeing the current pullback with interest.
Volume patterns are also weighing in favor of buyers. The past month has seen a handful of accumulation days crop up; signaling institutions are warming to ZM once more.
Call Spreads Look Tasty for ZM Stock
We’re midway between earnings reports and headed into the heart of summer. Tack on the slow-price trend, and you’ve got a hat trick of reasons why implied volatility is in the dumps at the 5th percentile. That makes long call spreads an attractive strategy if you think the bullishness continues.
The Trade: Buy the August $370/$390 bull call for $8.
The max loss is $8, and the max gain is $12.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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