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High-multiple cloud computing stocks got pummeled on Monday, with shareholders taking profits and rotating capital into less expensive financial instruments. The current trouble started on Friday after CrowdStrike Holdings, Inc. (CRWD) and Zoom Video Communications, Inc. (ZM) sold off despite strong quarterly reports, and problems expanded into other components this week. Both companies held multiples in excess of 40 times forward earnings prior to their declines.
The sell-off attracted wide-eyed media attention, but most of these issues haven’t traded well in the past two months. Even so, they remain heavily overbought after windfall 2019 returns, raising the odds for steeper downturns to shake out the large supply of weak hands. ServiceNow, Inc. (NOW) is a case in point, nearly doubling in price in the first half of the year, posting at all-time high in July, and completing a topping pattern to start the trading week.
Okta, Inc. (OKTA) offers identity protection solutions to businesses, universities, and non-profit organizations. The company came public in the low $20s in April 2017 and cleared range resistance in the first quarter of 2018, entering a strong trend advance that topped out in the mid-$70s in September. Buyers returned in January 2019 after a fourth quarter decline, carving a momentum-fueled uptick that posted a 121% return into July’s all-time high at $141.86.
Price action settled at the 50-day exponential moving average (EMA) in August, carving a basing pattern that broke to the downside on Monday, nearly reaching the 200-day EMA at $103. That level has aligned with the .382 Fibonacci rally retracement, predicting at least one strong bounce before the stock drops into the double digits. That buying impulse could test the broken 50-day EMA near $130, offering a short sale opportunity for aggressive traders.
The Trade Desk, Inc. (TTD) provides software platforms to manage digital advertising campaigns. A September 2016 initial public offering (IPO) in the upper $20s attracted little interest, yielding a trading range that broke to the upside in February 2017. The rally ended in the $50s in the fourth quarter, carving resistance that was finally mounted in May 2018. The stock posted impressive gains into August 2019’s all-time high at $289.51, gaining more than 225%.
It broke down from a three-month trading range on Monday while confirming resistance at the 50-day EMA. The decline nearly reached the 200-day EMA at $200, which should provide a short-term trading floor. However, this issue has been under distribution since June, indicating that smart money has already stepped aside, raising the potential for a much steeper decline that fills the February gap between $150 and $175.
Alteryx, Inc. (AYX) data analytic solutions allow businesses to conduct sophisticated numbers-crunching for a broad variety of applications. A March 2017 IPO opened at $17.25, generating an immediate uptrend that stair-stepped into the low $60s in September 2018. It carved a choppy triangle with resistance at that level and broke out in January 2019, entering a trend advance that posted a nearly 250% return into last week’s all-time high at $147.79.
The stock sold off more than 14% on Monday, giving up the past six weeks of upside and closing below the 50-day EMA for the first time since June 3. The 200-day EMA in the mid-$90s looks like a logical downside target and a good place to get on board, because this issue has outperformed its peers in recent months, setting the stage for a strong recovery. However, taking early exposure could be costly due to high volatility, so it’s best to wait for a downside target or basing pattern before getting on board.
The Bottom Line
High-priced cloud software stocks have entered intermediate corrections that are likely to test lower levels before attracting committed buying interest.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.
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