The setup on DigitalOcean can be appealing enough for a small roll of the dice
No, it’s not the prettiest inverted head and shoulder pattern in the world, but the setup on DigitalOcean Holdings (DOCN) may be just appealing enough for a small roll of the dice. I still don’t like the overall action in the market. I wouldn’t blame traders for sitting on the sidelines and investors for slowly taking positions or tightening stops. Inflation seems to be plaguing us, so we should take note. By crawling I mean in our views on stocks and trading. In terms of real world inflation, there is no creeping, inflation is an all-out flash right now showing us all its possessions.
The DOCN is the one I’ve been looking for since the IPO failed. This is not my first mention here nor my first exchange in the name. In March, I described my leggings strategy in the name with the $ 35- $ 40 zones being my primary targets. Stocks eventually hit a low of around $ 35.50 in May before quickly rebounding above $ 40. The first quarter results sparked the push to the lows, but the overall result was a short-term sellout for the bulls.
Compared to its peers, DOCN trades at a discount when it focuses on business value versus sales. Its annual revenue has grown 30% year over year, with projections set to keep that number fairly stable between 25% and 30% as investments have declined. Average revenue per customer increased 20% and the dollar’s net retention rate reached 107%, an increase of 600 basis points. Anything over 100% is positive for me.
As for this inverted head and shoulders model, it is aiming for a move to $ 55 this summer. It might be a bit aggressive, but I might see a 5 handles in the future here. The stock is thin, therefore an options trader is more difficult. I would stick with stocks or take a stock replacement type approach to the option. With a Full Stochastic indicator strengthening and a MACD hitting close highs (bullish divergence), I’m ready to take a starter here.
One thing to consider is that the stock has been higher for a week now so it is extended. That’s why I would only take a half-size position this week. A pullback to the $ 43 area with a rebound over that area would be ideal. Anything below $ 41.50 completely kills the momentum and bullish setup. If options are your thing, then the July $ 40 calls are how I would play it. Anything between $ 5.60 and $ 5.90 works as an attractive stock replacement. My preference is to just buy stocks around $ 45. Since it’s thinner and could work if it moves, I would also avoid the idea of selling covered calls against the name. Let the upper side breathe.
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