After an incredible run, Rackspace Hostings' (RAX) stock dropped more than 7% late Monday to below $21. Why? The cloud computing company reported weaker-than-expected first-quarter revenue of $518 million and guided lower on revenue than analysts expected for the current quarter.
It didn't matter the company reported adjusted earnings of 34 cents a share, easily beating the Street forecast of 22 cents per share. The fear is Rackspace's cloud position continues to erode as bigger players Amazon.com (AMZN) - Get Amazon.com, Inc. Report and Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report -- both Rackspace partners -- increases.
The shares had been on an incredible run, surging some 34% in the past three months. Even with that strong rise, the stock is down about 11% year to date, compared with a 0.68% rise in the S&P 500 (SPX) index. In other words, the stock -- in the past three months -- was making up for lost ground.
From a technical perspective, Rackspace's shares are not as broken as the 7% post-earnings decline might suggest. Take a look at the chart below, courtesy of TradingView.
While the company's weak second-quarter revenue forecast may serve as a near-term headwind, the long-term trend in the stock remains intact. All three of its key moving averages converge around the same area between $22 to $23.50, suggesting the stock will stabilize once the earnings report is fully digested and the selling stops.
As you can see from the short arrow above, in the days leading to Monday's earnings the stock had already declined about 11% from around $25 per share to Monday's regular session close of $22.54. This suggests investors were gearing up for an earnings disappointment, which turned out to be a smart trade. So combined with the 7% decline in the after-hours session Monday, that's almost 20% haircut in Rackspace stock in about two weeks. Now it's time to play the moving averages.
At around $21, the shares are now priced 4% below the 100-day at $21.85 (yellow line), 6.6% below the 50-day at $22.39 (pink line) and 13% below the 20-day at $23.72 (blue line). The focus, is going to be on the 20-day average, which is just above the solid green line, serving a mid-ground with Monday's close.
How to execute the trade: Buy RAX at any price from $$19.50 to 21 per share, using its $19 as near-term support. If it breaks below $19, exit the position with a loss and live to play again. The bet is the selling on the guidance was an overreaction. Within the next few weeks, the stock will attempt to recapture the 20-day at around $23.72, delivering a 13% gain from Tuesday's trading.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.