Adding to 1 Cybersecurity Name, Exiting Another After China Ban

For some time, Beijing has been concerned (and shown it) that technology purchased from Western-based companies could be hacked or used as a tool of espionage by foreign powers. 

Yes, I know that this distrust is a two-way street. For that reason, mainland China has, at times, sought to replace computer hardware and software purchased from external sources with domestic Chinese products. We have seen China restrict the import of advanced AI-capable GPUs from elite U.S. designers such as Nvidia (NVDA)  and Advanced Micro Devices (AMD) . 

Reuters is reporting on Wednesday morning that authorities in Beijing have informed local companies that they should stop using cybersecurity software developed by a number of U.S. and Israeli companies due to national security concerns. Impacted U.S. companies include Palo Alto Networks (PANW) ; VMWare, which is part of Broadcom (AVGO) ; and Fortinet (FTNT) . Israel's Check Point (CHKP)  is also impacted. 

Among those U.S. companies, Broadcom operates out of six locations in China, Palo Alto out of five and Fortinet out of three. For those about to ask, while yes, I do have a long position in Palo Alto, my top pick in the space, CrowdStrike Holdings (CRWD)  explicitly avoids doing business in either China or Russia. 

CrowdStrike has been very vocal on Chinese powers and businesses as a cyber threat of their own and has intentionally avoided that market. I also have not seen Zscaler (ZS)  named. That does not mean that they were not. Zscaler does some business in China.

This News.... 

...Has put the whammy on the shares of the entire cybersecurity side of the software industry, thanks to the wonders of passive investment. Does that mean that opportunity knocks? Let's explore.

My Plan

Readers will see that Palo Alto broke down from a ​rising-wedge pattern of bearish reversal in early November and went right into building a double-bottom pattern of bullish reversal. It appears that, even before Wednesday morning's pressure, the shares were already failing in their attempt to reach pivot ($200).

The shares, despite what does seem to have been a moderately improving daily MACD, have hit resistance at their own 200-day SMA four consecutive days now. That often means that professional portfolio managers are reducing long-side exposure at that level. I am such a manager. Should the shares fail to make contact with their 200-day line on Wednesday, that would be a very negative signal.

I am up 9% on this trade, but I have had to heavily manipulate net basis, and it has been more work than it has been worth. For those playing the long game, earnings are due in mid-February. I'll be taking my leave and getting my tail out of this name.

Readers will see that, from September through mid-December, CrowdStrike developed a bearish head-and-shoulders pattern with a $477 downside pivot. ​The trigger was pulled and the shares traded as low as $449. From there, until now, the stock has hung on to the 200-day SMA, but as support, not resistance. Both relative strength and the daily MACD were improving until Wednesday morning's sell-off, which as you know, I believe is a broad, passive algorithmic error.

I will likely add to this long position on weakness on Wednesday as I would expect the stock to regain its 200-day SMA (currently $465), which will become the upside pivot. At that point, I will be looking for a second cybersecurity stock as CRWD will be the lone name in that space in the Sarge-folio. I prefer to have two as demand for high-level cybersecurity is going to be somewhat permanent in my opinion. I will add a name for myself and for you readers if you follow, once the dust settles.

CrowdStrike (CRWD) Plan

Target Price: $560

Pivot: $200-day SMA (currently $465)

Add: On Wednesday, below the 200-day SMA

Panic: If that thin red line is not regained within a week

At the time of publication, Guilfoyle was long CRWD, PANW, NVDA and AMD equity.