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Zoom Video Nears Must-Hold Support After Earnings Spill

Zoom Video's earnings were pretty good, which makes the selloff a bit puzzling.

Zoom Video  (ZM) - Get Zoom Video Communications Inc. Report was once one of the hottest initial public offerings on Wall Street. But lately no one wants to touch the stock. Shares are down about 10% in trading Friday after the company delivered its third-quarter earnings.

The results were pretty good, which makes this selloff a bit puzzling. As the stock nears a critical point of support though, bulls could be looking at an attractive risk/reward long position in the not-too-distant future.

Earnings of 9 cents a share topped estimates by 6 cents, while revenue of $166.6 million surged almost 85% year over year and beat expectations by more than $10 million.

Guidance was well above expectations for next quarter too. Management expects earnings of 7 cents a share with revenue in a range of $175 million to $176 million. Consensus expectations called for profit of just 4 cents a share on revenue of $165.2 million.

Of course, management also gave a big boost to its full-year revenue and earnings outlooks, which also were well above consensus expectations.

So why is this one falling? It’s an odd reaction to a beat-and-raise quarter, but it may spell opportunity if investors can get the stock for a bit cheaper.

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Trading Zoom Video Stock

Daily chart of Zoom Video stock. 

Daily chart of Zoom Video stock. 

Zoom Video's stock was priced in its April IPO at $36 a share. Despite rallying to more than $100 just two months later, ZM has stock lost a bulk of the momentum that had carried it higher.

Over the last few months, the stock has gone on to make a series of lower highs, highlighted by downtrend resistance (blue line). Now, shares are below all of its major moving averages, and are dangerously close to the post-IPO and October lows.

Those marks come into play between $60 and $61.

More aggressive traders can consider a long position on Friday’s decline, knowing that they can park a stop-loss just below key support. More conservative bulls may find it more advantageous to wait for a potentially further dip down into this support zone.

Both plays have their risks. The aggressive bull risks a larger drawdown in their position - even if support holds and they end up being right. The conservative bull risks waiting for too perfect of a setup and missing the possible rebound.

Of course, both will turn out to be losers if support fails and shares break lower. But that’s the risk that traders take. On a rebound, let’s see if ZM can erase its post-earnings losses and rebound back up toward its 50-day moving average near $70.