Trade of the Day: iRobot Corporation (IRBT) Stock Is Almost a Buy

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Shares of iRobot Corporation (NASDAQ:IRBT), despite a recent multiweek pullback, remain higher by nearly 60% in 2017 in what has been one of the standout stocks and favorites of the momentum-trading crowd. While fundamental analyst have plenty of doubts around the currently lofty valuation (a price-to-earnings ratio of around 45) of this growth stock, from a trend-following perspective IRBT stock is finally nearing a better buying opportunity for the first time in a couple of months.

Trade of the Day: iRobot Corporation (IRBT) Stock Is Almost a Buy

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Every time a growth company begins to trade at seemingly unsustainably high multiples, fundamental analyst are quick to point to a lack of a product pipe line or just voice their concerns in a “show me the money” type of way. Not infrequently are growth stocks akin to a “hope story” in that buyers are believers in the company becoming a disruptor in its industry, or even redefining an entire industry.

Currently, both iRobot and Tesla Inc (NASDAQ:TSLA) in my eye fall into this category of “hope stocks.” Doubters of the Tesla story are concerned about production capability and general adoption rates while doubters in iRobot note that the company is largely still banking on its Roomba vacuum cleaners, and that competition in this space is heating up.

I am not here to either agree or disagree with the fundamental story of either of these two companies but rather want to show how from a price action perspective, a stock like this can be profited from.

IRBT Stock Charts


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Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

Much like TSLA stock quickly took off to the upside in 2013, IRBT stock did so starting in the September/October 2016 period. While the stock has had a couple of multiweek pullbacks along the way, the move to the upside since has largely been a relentless stampede.

This is clearly visible on the multiyear weekly chart, where we see the explosive move higher over the past year or so.


Click to Enlarge

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

While through a multiquarter lens IRBT stock arguably remains hopelessly overbought, on the daily chart we see that the recent 15% pullback now has it closing in on a better confluence area of technical support. This area is made up of the lower end of the year-to-date up-trending channel (purple-dotted parallels) and the blue 100-day moving average.

The key principle here for any stocks, and particularly for momentum-chaser stocks such as IRBT, is that the upper end of trading ranges are better to be sold into rather than hoping for price continuation. The reality is that chart chasers who make bullish bets at the top end of trading ranges ultimately all die. Thus the mantra of “buy the dip and sell the rip” holds true for momentum stocks.

However, rather than blindly buying IRBT stock at current levels just because it has fallen for the past few weeks and is nearing a better confluence technical support area, I first need to see a strong bullish reversal take hold that proves sellers are exhausted in the near-term and buyers are ready to step back up. Bullish and bearish reversals are an integral part of profitably navigating the stock market and for those unfamiliar with these strong bullish reversals, I will be holding a special webinar Aug. 30 for InvestorPlace readers on how to find high probability trade setups using these powerful moves. Register HERE.

If and when IRBT stock stages a bullish reversal, possibly around the $85 to $88 area, it could set up a better-probability spot to buy it again for a move back to the upper end of the year-to-date trading range in the low $110s.

Check out Anthony Mirhaydari’s Daily Market Outlook for Aug. 24.

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