The best time to buy ZM

Free After-Hours Analysis: 

Zoom (ZM) is one of this year’s biggest Covid winners, up over 600% since January 1st. You have to be living under a rock if you haven’t heard of this company either because of their ubiquitous video conferencing app or its meteoric stock.

While ZM has been on a jaw-dropping run this year, more recently, prices have stalled under $500. Is this the end of the line for ZM? Or just another pause on our way higher?

A few weeks ago I told subscribers to be careful as the stock gapped up near $500 following blow-out earnings. While it’s great to own a stock on days like that, gaps are dangerous things because they have a tendency of retreating and filling. And that’s exactly what happened over the next several days.

One of the most obvious things about stocks is before they make a big move, they start with a small move. The most obvious signal ZM was in trouble was undercutting the gap’s intraday lows the next day. That was as clear of a signal to get out as they come.

And the thing to remember is just because we sell a stock doesn’t mean we are giving up on it. When the risk/reward moves against us, it makes sense to lock-in some of those heady profits.

A few days later the stock bottomed after filling in most of the gap during September’s larger equity pullback. But this stock was too hot to stay down long and prices quickly pushed back to $500. If a person still liked the stock, there was plenty of time to buy back in at lower prices and ride this one back to $500.

But as soon as the stock broke through $500 and retreated back under the psychological level, that told us it wasn’t quite ready for the next leg higher and it needed to consolidate recent gains. Take profits again at $500 and wait for the next breakout.

I don’t think this stock’s run is over, but I would be hesitant about buying it under $500. I’d rather wait for it to break above $500 first. As I often tell subscribers, it is better to be a little late than a lot early.

Jumping in at a clearly defined level allows me to set a nearby stop and limit my risk. If the entire market continues slumping, this stock could easily retest $400 support before climbing up to $600. There is no need to ride this down and be tempted into a poorly timed sale near the lows. I perfectly happily give up a few dollars if it allows me to get in at a better-defined level where I can manage my risk.

As I said, I still like this stock but I want to see it break $500 first. Start small, get in early, keep a nearby stop, and only add to what is working.

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