Software Stock's "Buy" Signal Has Never Been Wrong

A bullish signal just sounded on the charts for Zscaler

It's been a bang-up year for the cloud-based security concern Zscaler Inc (NASDAQ:ZS), which just hit an all-time high of $82.25 late last week. While the stock has cooled off a little, it's still up nearly 93% year-to-date today, testing a recent level of support at its 20-day moving average. What's more, this pullback has put ZS in line with a bullish signal which has never been wrong.

Specifically Zscaler just came within one standard deviation of its 40-day moving average -- a trendline that, according to Schaeffer's Senior Quantitative Analyst Rocky White, has flashed three other times in the stock's lifetime. ZS has been higher one month later each time, averaging a 7% return. From the equity's current perch at $75.84, a similar move would have ZS trading right below its record peak at $81.15.

An unwinding of shorts could put the wind at ZS' back too. Despite it's impressive price action on the charts, short interest is at the highest its been all year, spiking 24.9% during the last two reporting periods to 8.62 million shares sold short. This number represents a 14.1% of the stock's available float and would take over three days to cover, leaving the door open for a short squeeze.

Analysts upgrades could be on the horizon, especially since the consensus 12-month target price of $77.93 represents just a 3.1% premium to current levels. Additionally, eight of the 13 analysts in coverage still consider it a "hold" or worse.

Considering this, now might be a good time to speculate on Zscaler's next move with options. The equity's Schaeffer's Volatility Index (SVI) of 50% that ranks in the 11th percentile of its annual range, suggesting that near-term option traders are pricing in relatively low volatility expectations.