It’s more than okay to put Roku (NASDAQ:ROKU) shares on your buy or watch list for its long-term growth potential following a questionable earnings disappointment and “over-the-top” reaction from investors. However, would-be bulls would still be wise to wait on one of two changes to the bearish program playing on the Roku stock price chart before buying. Let me explain.
Late last week, ROKU investors were unpleasantly greeted by the risky side of momentum investing in a more challenging investing environment much less forgiving of anything other than perfection. By the numbers, Roku stock, the market’s largest “over-the-top” or OTT streaming television provider, announced solid Q3 results which topped the Street’s top and bottom lines and saw mid-double-digit sales growth of nearly 39%. That’s the good news.
The bad news is in-line revenue guidance and, more pressing, Roku’s reduced and below-views earnings guidance for the company’s fourth-quarter sullied the report. The net result found investors pulling the plug with ROKU shares plunging 22%. The price action was a world removed from Roku stock’s all-time-highs of $77.57, notched just six weeks ago. Back then, bulls were as confident as Buzz Lightyear shouting “To infinity and beyond!”
Roku Stock Weekly Chart
As the weekly chart emphasizes, a difficult October has morphed into an even more challenging environment for Roku stock bulls in November. An attempt at bottoming out of a technically well-supported two-bar doji and hammer candlestick pattern was effectively quashed with last week’s earnings reaction.
On the bright side, the aggressive sell-off in Roku stock has put shares deeper into a wide price band comprised of channel, Fibonacci and Bollinger supports. This should allow for a well-conceived purchase on the ROKU price chart. But for investors interested in Roku’s growth story, I’d still recommend waiting on one of two scenarios to play out.
Roku Stock Daily Chart
Drilling down in the price action to the daily chart, the first scenario which would merit buying shares is if ROKU can reverse and reclaim $48. That’s roughly 9% above current prices and obviously forfeits some nice short-term gains if Roku was simply purchased today and proceeds higher. Nevertheless, waiting on Roku stock is compelling.
This style of entry allows the bullish trader to gain confirmation of Roku stock’s support zone having held. That’s important. It’s also likely stochastics will be more supportive for buying shares than today’s fairly weak set-up. As well, a price move through $48 will allow ROKU to re-cross the 200-day simple moving average support and its pre-Q2 earnings gap closing price — which could help drive shares higher.
The second buy situation, which may have a stronger likelihood of playing out, would be a move in Roku stock towards $40 or even slightly lower as shares test the 62% retracement level. Given the broader market’s questionable V-shaped bottom and ROKU’s current non-supportive stochastics set-up, this kind of price pressure could happen in a jiffy. And that’s why it’s in traders best interest to be patient.
If this type of move plays out in Roku stock, buying into the proverbial falling knife makes sense in conjunction with a stop below $37.75. The stop would serve to protect against larger potential losses if the support zone fails. At the same time, this price level should be far enough removed from the action, as well as allowing enough wiggle room beneath the 62% level, to avoid becoming an easy mark for algorithms and bearish traders.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.