J.P. Morgan characterizes Zoom Video Communications (NASDAQ:ZM) as "washed out" as a video conference provider in the short term. However, the bank believes in the company's underlying technology and market penetration in the long term. J.P. Morgan sees the company's stock rising more than 15% to $85. While that's possible in the long run, I expect the stock will first dip to $62 within the next six months.
Here's why:
Zoom stock has been developing an H&S bottom since Mar. 14. However, after lowering its full-year profit and sales forecast, the company's stock plummeted 16.5%, blowing out the reversal pattern. On Sept. 16, the stock took another turn lower, falling below the would-be reversal pattern's head, and registering a new low. On Oct. 6, the stock attempted the $79 level, where the head's low was, and failed, falling back to its recent lows.
An H&S failure results from misplaced optimism, jiving with J.P. Morgan's pessimistic view regarding the firm's short-term performance due to increased competition from Microsoft (NASDAQ:MSFT) and others. Disappointed longs closed position, reducing demand, allowing supply to drive prices lower. This development increases the risk of attracting short sellers, increasing the cost. A technician measures the distance between the head and the right shoulder to reach a downward target. The length of $17.08 between the May 12 low of the head and the July 15 shoulder low of $96.11 is then assumed to repeat from $79.03 of the pattern's head to the downside.
Trading Strategies
Conservative traders should wait for the price to break the $70 round number and rally to confirm the resistance before risking a short position.
Moderate traders would wait for the throwback for a better entry if not for added confirmation.
Aggressive traders can short according to their personal strategy. If you don't have one, here are generic examples for educational purposes:
Trade Sample 1 - Aggressive Short Position
- Entry: $76
- Stop-Loss $80
- Risk: $4
- Target: $64
- Reward: $12
- Risk-Reward Ratio: 1:3
Trade Sample 2 - Moderate Short Position
- Entry: $79
- Stop-Loss: $80
- Risk: $1
- Target: $72
- Reward: $7
- Risk-Reward Ratio: 1:7
Trade Sample 3 - Conservative Short Position
- Entry: $79 (if found resistance, after falling below $70)
- Stop-loss: $80
- Risk: $1
- Target: $72
- Reward: $7
- Risk-Reward Ratio: 1:7
Disclaimer: The author has no positions in any securities mentioned in this article.