The San Jose, California-based IT security company that provides Internet security, web security, firewalls, sandboxing, SSL inspection, antivirus, vulnerability management and granular control of user activity in cloud computing, mobile, and Internet of things environments, Zscaler Inc. (NASDAQ: ZS) seem to be ready for a price correction according to its latest charts.
#1 Rising Wedge Pattern: The daily chart shows that the stock has been forming a rising wedge pattern during the past few months. This is a bearish pattern and is marked in pink color lines in the daily chart. Once the stock reaches the lower rail and breaks down from the rising wedge pattern, it has the potential to move lower in the near-term.
#2 Long Wick Candle: The daily chart shows that the stock had formed a candle with a long upper wick. This is marked as an orange ellipse. This is usually a possible bearish sign.
#4 Supply area: The weekly chart shows that the stock is currently near a supply area, which is marked as a purple color ellipse.
The stock had formed long tails during the past few weeks but was not able to cross above this level.
Whenever the stock attempted to cross above the top of this supply area, it bounced back down, indicating that there is a distribution happening at this level. This is a bearish sign.
#5 Bearish RSI: The weekly chart shows that the RSI is currently at overbought levels and has started to move down. This is also a possible bearish sign.
#6 Bearish Stochastic: The stochastic in the weekly chart is currently moving down after reaching overbought levels. The %K line has also currently crossed below the %D line. All these indicate possible bearishness.
Recommended Trade (based on the charts)
Sell Levels: If you want to get in on this trade, you can sell the shares of ZS below the price of $120.
TP: Our first target price is $110. In case the stock closes below this price and moves below the 50-day moving average, the second target price is $100.
SL: To limit risk, place a stop loss at $126.60. Note that this stop loss is on a closing basis.
Our target potential downside is nearly 8% to 17% in the next 3-6 months.
For a risk of $6.60, our target rewards are $10.00 and $20.00. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers nearly 2x to 3x rewards compared to the risks.
Risks to Consider
The stock may reverse its overall trend if it breaks upwards from the rising wedge pattern with high volume. The breakout of the stock could also be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.
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