An observability service for cloud-scale applications, Datadog (DDOG) is flashing a rare contrarian signal—what I consider to be a bullish pivot. The problem (and the opportunity) is that this signal for DDOG stock is not apparent. To the best of my knowledge, no one in the financial publication ecosystem has mentioned the topic.
Indeed, I would be shocked to discover if anyone did mention it because the signal is simply not visible to traditional investment market methodologies. By their very definition, technical and fundamental analysis involve using either past pricing dynamics or past financial performances to determine future price or valuation. At first, the methodology sounds reasonable until you realize that price and financial metrics are simply scalar representations.
To understand the probable forward dynamics of a publicly traded security, you must categorize and quantify behavioral states — and more importantly, their transition from one state to another. Thus, my theory is that the emotions of fear and greed, whether an investor wants to buy a stock or not, can be categorized, quantified, and ultimately predicted. The bullish signal for DDOG stock is flashing in the behavioral state, not the price. As a result, I’m recommending a Buy on DDOG stock.
Laying Out the Conceptual Framework Behind DDOG Stock
In a typical financial publication, evaluating a security’s potential often involves thoroughly examining its financial performance, the prevailing market narratives, and various chart interpretations to reinforce the analysis. However, in practice, both fundamental and technical analysis should be viewed as secondary tools rather than primary decision-making frameworks.
The uncomfortable reality is this: technical analysis resembles a friend cautioning you about speeding only after a police officer has already signaled you to pull over. On the other hand, fundamental analysis is akin to a partner reminding you to be more careful next time, long after the incident, as you prepare for a court appearance. While both approaches are well-intentioned, they offer limited predictive power beyond broad generalizations.
To clarify, the challenge does not lie with individual analysts but with the methodologies themselves. As noted earlier, both technical and fundamental analysis are grounded in scalar representations—specifically, continuous-time signal processing models. This is essentially a sophisticated way of describing the infinite range of potential prices and metrics that can emerge.
As such, extracting meaning out of the boundless range of pricing and performance possibilities is structurally tricky- if not nearly impossible. Instead, in my opinion, it is far better to deploy discretization: the mathematical process of compressing all the chaos of price discovery into a simple, quasi-binary code.
In this manner, investors can frame the core demand profile of DDOG stock (or any other security) as behavioral states. With this framework, it becomes possible to apply Markovian principles, which, in a rough summary, are the study of probabilities from one state to another. It’s the scientific model oncologists use to track disease progression and calculate survival rates.
What are Markovian Principles?
Named after Russian mathematician Andrey Markov, Markovian principles undergird myriad surprising functions within society, from telecommunications (voice routing and data packets) to internet search engines (structuring webpages as nodes) and, ironically, religious doctrines. Morality is conveyed as a binary paradigm rather than as a continuous spectrum.
Markovian principles open the door to the probabilities of transitions between states, presenting a powerful (albeit underappreciated) tool in finance.
Extracting the Hidden Code in Datadog’s Demand Profile
In the last 10 weeks, DDOG stock flashed a sign that everyone else has overlooked, simply because scalar-signal-based analyses were blind to it. Specifically, DDOG posted a “3-7” sequence: three weeks of upside interspersed with seven weeks of downside. This bear-dominated behavioral state may appear ominous. However, the seven times it flashed, the security shot higher the following week.
Now, there’s a risk factor to consider. Assuming the positive pathway, the median return is only 0.99%. On the flipside, if the negative pathway emerges, the median loss lands at 2.97%. Put another way, the risk-reward magnitude asymmetrically favors the bears by a ratio of three-to-one.
However, when extending the projecting price dynamics of the 3-7 sequence response further out, we discover that in the third subsequent week, the negative pathway is actually projected, temporarily, to exceed the performance of the positive pathway.
With this forecasted demand profile in mind, options traders may consider the 100/105 bull call spread for the options chain expiring May 16. This transaction involves buying the $100 call and simultaneously selling the $105 call, resulting in a net debit paid of $275 (at time of writing). Should DDOG stock rise through the short strike price of $105 at expiration, the maximum reward is $225, a payout of nearly 82%.
What I like about this trading setup is that, based on past empirical data on how prior 3-7 sequences have played out, there appear to be two main possibilities: either a gradual rise higher or an extremely violent swing with an upward bias. With the third subsequent week representing a zone of opportunity where both pathways intersect favorably for the bulls, the 100/105 is arguably the most strategic call spread available.
Is Datadog a Buy, Sell, or Hold?
On Wall Street, DDOG stock carries a Strong Buy consensus rating based on 26 Buy, seven Hold, and zero Sell ratings over the past three months. DDOG’s average price target of $145.65 implies 42.5% upside potential over the next twelve months.
Ignore the Noise to See the Signal on DDOG Stock
Although standard analytical methodologies mean well, they simply cannot identify changes in behavioral characteristics. Scientifically, these standard approaches focus on price, a scalar representation, rather than demand, which is discrete and defined. Only under defined boundaries can analysts apply Markovian principles, which then changes the entire game of risk modeling.
Looking ahead, options traders may reasonably anticipate that DDOG stock may pop higher following the 3-7 sequence. Two main pathways have been identified, both projected to converge in the third subsequent week. As such, speculators can buy a bull call spread in anticipation of this demand swing.