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Buy the Dip After Zillow's Plunge? That Sounds Crazy

Zillow stock has gotten slammed this week and is down about 35%, but that cratering could be a buying opportunity for sharp-eyed investors.

Shares of Zillow  (Z) - Get Zillow Group, Inc. Class C Report plummeted more than 22% on Wednesday as the company announced it will halt its home-flipping business, while also cutting 25% of its staff.

Zillow stock was immediately in focus during the pre-market trading session, with shares down more than 17% in early trading.

Those losses have only worsened and have thwarted a hope by bulls that investors will stop the fire sale of Zillow and start focusing on the Fed.

A larger-than-expected third-quarter loss isn’t helping matters.

The stock was already trading poorly this week, falling 6.25% on Monday and more than 10% on Tuesday. In the last three days, shares have plunged about 35%.

That said, there’s a significant support area that bulls should be focused on.

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Trading Zillow Stock

Weekly chart of Zillow stock.

Weekly chart of Zillow stock.

Even before Wednesday’s massive decline, shares of Zillow were showing signs of distress.

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After recently breaking out over a number of key short-term moving averages, as well as the 10-week and 21-week moving averages, shares fell below all of these marks along with downtrend resistance (blue line).

While $85 support was holding up before Wednesday’s fall, it’s a distant memory for investors at this point.

On the daily chart, Zillow stock looks doomed, potential for a bounce looks more promising on the weekly.

Shares are not only trading down to the 200-week moving average for the first time since the COVID selloff in early 2020, but they are also trading down into the major breakout area in the $66 to $68 area.

This is kind of a make-or-break spot for Zillow stock. If this area fails, perhaps it opens the door down to a potential test of $50.

On a bounce, I’d like to see a move back into the low $70s. Above $75 and perhaps Zillow can squeeze up toward its short-term daily moving averages.

So how do we trade this particular setup?

I would love for a break below Wednesday's low or an open below this level, before Zillow stock makes a new low and reclaims Wednesday’s low. This gives us a reversal to trade with a low-risk stop-loss at the new low. 

If you're feeling a bit more aggressive, use the four-hour chart, or the weekly chart if you want a more conservative play.

Conversely, traders could also buy the dip now, but with the market a bit extended in the short term and the Fed on tap, it may put too much risk on the table for some.