DocuSign (DOCU) Could Sell Off Into the $140s

DocuSign, Inc. (DOCU) fell more than 10% on Friday despite beating top- and bottom-line second quarter estimates and raising third quarter and fiscal year guidance. The aggressive sell-the-news reaction posted the third high-volume selloff day in a row for the popular momentum play, failing the Sept. 1 breakout above resistance near $215. Taken together, it's likely that the software provider has now topped out after a 290%-plus return since the last trading day of 2019.

Key Takeaways

  • DocuSign stock sold off last week despite a blowout quarter and higher guidance.
  • Price action has just failed a breakout on heavy volume.
  • The stock may have entered a correction that could stretch into the $140s.

The stock has fallen more than 10 points in Tuesday's pre-market, wiping out a modest bounce into Friday's closing bell. Accumulation readings have taken a huge hit in the past week, dumping from all-time highs to five-month lows. Even so, the decline is now approaching strong support at the narrowly aligned 50-day exponential moving average (EMA) and psychological $200 level, raising the odds for a short-term bounce that could relieve frazzled nerves.

Wall Street has grown more cautious about DocuSign's long-term outlook, lowering consensus to a "Moderate Buy" based upon nine "Buy" and seven "Hold" recommendations. No analysts are recommending that shareholders sell their positions and move to the sidelines, despite the four-day 85-point somersault. Price targets currently range from a low of $210 to a Street-high $300, while the stock will open Tuesday's session under the low target after reversing near the high target last week.

A climax occurs at the end of a bull or bear market cycle and is characterized by escalated trading volume and sharp price movements. Climaxes are usually preceded by extreme sentiment readings – either excessive euphoria at market peaks or excessive pessimism at market bottoms.

DocuSign Daily Chart (2018 – 2020)

Chart showing the share price performance of DocuSign, Inc. (DOCU)

The company came public at $38.00 in April 2018 and entered an immediate uptrend that topped out in the mid-$60s in July. It bounced back to that level and failed a breakout in August, giving way to intense selling pressure that sliced through the IPO opening print before bottoming out at an all-time low in the mid-$30s in November. Price action spent the next 11 months grinding higher in two broad rally waves, finally completing a 100% retracement into the prior high in October.

The stock broke out immediately, entering a channeled advance that escalated in January 2020. It topped out in the low $90s a few weeks later and sold off with world markets, dropping to a three-year low in March and turning sharply higher into the second quarter. The uptick reached the first quarter peak in April and broke out, catching an intense momentum bid that added points at a historic pace into July, when buying pressure stalled above $200.

DocuSign Short-Term Outlook

A vertical breakout at the start of September added 75 points in just two sessions, while the steep decline has relinquished those gains, signaling a high-volume failed breakout consistent with a bearish change in trend after a buying climax. The on-balance volume (OBV) accumulation-distribution indicator highlights this volatile reversal, dumping to the lowest low since May, when the stock was trading nearly 100 points lower.

A breakdown through the $200 level could stoke downside pressure because many momentum traders were trapped at the highs and are now hoping to get bailed out by a strong bounce. This group could hit the exits all at the same time, triggering a decline that could easily reach the 200-day EMA near $140. On the upside, an oversold bounce may have trouble mounting the $240 to $250 zone, marking a final opportunity to exit gracefully.

An oversold bounce is a rally in prices that occurs due to the selloff preceding it being perceived as too severe.

The Bottom Line

DocuSign stock has reversed on heavy volume and failed a breakout to an all-time high. This type of price action is routinely seen at long-term and intermediate tops, raising the odds that the stock will trade much lower in coming months.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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