For active traders wanting to profit from bearish follow-through after last week’s shot over the bow of 2019’s massive rally, shorting Roku (NASDAQ:ROKU) stock looks like a winning strategy for our bearish audience. Let me explain.
This year’s regularly scheduled market broadcast of Bulls Gone Wild was canceled this past Friday. Major averages like the S&P 500 and Nasdaq showed chinks in the bulls’ armor on either side of 2%. Bearish theatrics were chalked up to fresh signs the yield curve is warning of a recession. But don’t think for a second that bullish investors were overreacting and use Friday as a buy-the-dip opportunity in the markets — or in over-the-top streaming giant and growth star ROKU stock for that matter.
As bad as Friday’s programming change may have been for the major indices, the smaller-cap averages associated with bigger growth potential got hammered much harder on the session. That’s bad news. Even worse though, the group as a whole, including ROKU stock, has been warning the last couple weeks that bulls have overstayed their welcome.
SPDR Mid-Cap ETF
For its part, the price action in the SPDR S&P Mid-Cap (NYSEARCA:MDY) has struggled after matching its bear-market decline. More troubling, unlike the larger market cap indices, MDY has failed to make a new high since late February. And it gets worse and possibly even more treacherous for ROKU stock bulls.
The past couple weeks have found MDY falling back below the 200-day simple moving average and the key trend-line acting as resistance, with a lower high pattern emerging. Now and following Friday’s bearish technical swipe, shares have narrowly established a lower low formation which confirms a bonafide downtrend in bear territory for the ETF.
Bottom line, MDY’s technical weakness is likely bad news for a growth stock like Roku, unless you’re willing to profit from shorting shares as a bear.
As we can see on the daily chart, ROKU stock, shares have easily outperformed its mid-cap peers both up and down. Last year’s correction of 66% and 2019’s eye-popping rally of 100%-plus confirm the terror and excitement of being on the right side of how Wall Street perceives growth stocks like Roku.
The problem, as detailed above, is that smaller growth names like ROKU stock have already been giving indications that the market’s rally has gone too far and is now setting itself up for a larger correction.
For their part, shares of Roku are off about 16% from their recent highs as of Friday’s close. That’s a lot, right? Most likely it’s not. If we’re right and another correction is just underway in the broader market, a 30% decline or more could come as 2018’s technical drubbing proved it is a reality facing ROKU stock. But this would provide windfall profits for bearish short-sellers.
For traders agreeable with this outlook, rather than simply watch the action as idle couch potatoes, shorting ROKU stock below $62.50 appears approachable. This slightly below-the-market entry allows for a bit of wiggle room and a clean breakdown of Roku’s trend-line from a bear flag pattern without giving away too much profit potential.
If a 30% correction is to occur over the coming weeks, ROKU stock would be trading near $52 a share. That’s some nice room for profiting from a short position at $62.50.
As a decline of this size would also challenge the 200-day simple moving average and with the 50% support level just narrowly below, it’s an attractive forecast for bears to consider. And with an initial stop above $68 and the bear flag pattern high, tuning in for a short position in ROKU stock looks even better.
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.
