Zscaler: A Messy Spring Setup After an Earnings Washout

The Setup

ZS has sold off aggressively following its latest earnings update last week. The market clearly did not like the combination of guidance, sales leadership changes, and the risk that growth may be moderating from here.

The share price reaction was violent being down over 30%. But perhaps this creates an opportunity because the results weren't actually too bad.

This is where the chart becomes interesting. The stock did not simply drift lower. It flushed below a prior low on heavy volume, creating the kind of event-driven washout that can sometimes mark exhaustion. The important part is what happened next: ZS quickly reclaimed that breakdown area.

This is not a clean, obvious, textbook spring. It is messier and more speculative. But the basic ingredients are there: a prior support area, a break below that level albeit via a sharp news-driven sell-off, and then a reclaim back above the breakdown zone. For us, the reclaim matters more than the sell-off itself and that's what we're going to trade. Albeit with smaller position size because it's a little more speculative.

Why This Counts As A Spring Candidate

The stock had been in a clear downtrend for months, with price sitting below the main moving averages and sentiment already weak. After a short rally, the earnings reaction then created a further flush below the recent low. On the surface, that looked bearish. But if sellers force a breakdown and then fail to hold the stock below that level, the character of the move starts to change.

That is the potential opportunity here.

The chart now has a defined spring low, a clear reclaim area, and a logical first upside zone around the prior supply area in the high $170s to low $180s. That does not mean ZS is suddenly fixed. It simply means the risk/reward may have shifted from chasing weakness to watching for a failed breakdown.

The invalidation is also clear. If ZS loses the post-earnings low again, the spring has failed and the trade should be exited.

This remains a speculative setup. The stock is still below a lot of overhead supply, and the market has not forgotten the concerns raised by the update. But if ZS can hold the reclaim and continue to push higher, this could become a good example of a messy spring forming around a major news event. The upside potential could be very good.