After a surprise pre-announcement lowering its quarterly revenue guidance, shares of content delivery network Fastly (FSLY) plunged 26.9% in after-hours trading Wednesday. But are they now a buy? Jim Cramer weighed in during Wednesday's Mad Money program and Stephen Guilfoyle on Real Money this morning.
Cramer said he's long been a fan of Fastly, after interviewing the CEO back in May. But after shares rallied 32% in just the past month, even Cramer warned that the shares were getting ahead of themselves. Momentum stocks that are priced for perfection are highly dangerous, he said, and trading at 32 times sales, Fastly was among the highest-valued cloud stocks he followed.
So what should investors do with Fastly now that shares have plummeted?
Let's check out the charts.
In the daily Japanese candlestick chart of FSLY, below, we can see a bearish shooting star formation on Tuesday and bearish confirmation on Wednesday with a bearish engulfing pattern. Today we see a large falling window or gap. We used the quick-turning 10-day and 20-day moving averages to get a sense how short-term traders might behave.
The trading volume is likely to be very heavy today as traders vote with their feet. The On-Balance-Volume (OBV) was giving us a heads up some time ago as it has failed to move to a new high with prices earlier this month. This bearish divergence was a tip off. The OBV line is pointed down now.
The Moving Average Convergence Divergence (MACD) oscillator has narrowed significantly and could soon cross to the downside.
In this daily Point and Figure chart of FSLY, below, we can see the sharp decline without the price gap. Point and Figure charts fill in the prices as if they were traded. A potential downside price target in the $35 area is indicated.
Bottom-line strategy: Long-time readers of Kamich's Korner may remember me talking about a technique from a founder and trader at Commodity Corp., Amos Hostetter. Hostetter used to say that if prices moved more than 50% through a support zone they were likely to move all the way through. So what is the support zone of FSLY? If we consider it roughly the $70-$100 area from July to September as support then weakness below $85 would not be good. Traders need to watch and worry about weakness below $85 as it could precipitate further declines.