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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 Free 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.

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.