Is This Stock’s Rally an Opportunity, Or a Trap?

Shares of cybersecurity companies including Palo Alto Networks Inc (NYSE:PANW) and FireEye Inc (NASDAQ:FEYE) rallied on Monday following the weekend news of the malicious “WannaCry” worm infecting tens of thousands of computers. For its part, PANW stock has brought its two-week gain to about 10%.

However, while this rally certainly has the potential to turn into something more meaningful, for now, Palo Alto Networks really must prove itself a bit more.

One trap that I’ve seen many traders fall into as it relates to this industry is that they buy and chase these stocks higher upon any news of a new virus making the rounds.

More often than not, these stocks do get a pop on such news (Monday was a great example), but unless any given virus turns into more of an epidemic, it’s unlikely to dramatically alter the bottom line of these cybersecurity stocks.

When I offered a bullish outlook on FEYE stock last week, on May 8, I pointed to the notably bullish reaction of FireEye to its latest earnings report.

The rally aggressively broke shares past a notable and previously tough line of resistance. The stock popped by another 7.5% on Monday.

PANW Stock Charts
Looking at Palo Alto’s multiyear chart, we see that ever since the stock exhausted itself from a multiyear run in summer 2015, it has struggled to get back on its feet and every rally has been met with renewed selling pressure.

The roller coaster continued this year when PANW stock lost 30% of its value on March 1 following the company’s most recent earnings report. This pushed shares right back to the lower end of their trading range, where they then began a new consolidation phase in April.

The next major tell for the stock? Look out to May 31, when Palo Alto Networks is scheduled to report its next batch of earnings.

On the daily chart, we see that on May 3, PANW shares broke out of a tight, wedge-like formation. It began to resolve higher along with FEYE stock, which we mentioned above.

The bulls will point to the fact that the stock still remains at the lower end of the big consolidation pattern (black parallels) on the weekly chart above while it also remains oversold from a momentum perspective in the intermediate-term.

The bulls see that the breakaway rally that has taken hold in the stock thus far in May could be the start of something more promising.

For my part, I see an opportunity to buy some PANW stock near current levels, as well as partially protect that position with an at-the-money put option expiring in June or September. This gives investors an opportunity to still participate on the upside in the stock while being at least partially protected should the stock drop sharply following the May 31 earnings report.

You can place a last-resort stop-loss around $108. On the upside, traders can target the $135 area over the next couple of months.

— Serge Berger

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Source: Investor Place



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