Here we are amidst another binary week where the outcome of stock markets depends on headlines, especially from the U.S. versus China negotiations. The two sides are set to meet again but this time they are starting from scratch. So at best I can expect a can-kick deal, if at all.
There is little chance that they will reach any concrete path to a full agreement. In fact, a rumor broke out that China was willing to deal now but only on the easy issue. This means that they want to skirt the intellectual property (IP) rule changes. I doubt that President Donald Trump will be willing to agree to this without major concessions.
It is important to note that these and most other stocks will not rally if the negotiations breakdown harshly, so any bullish setups should come with proper stop losses depending on trader time frames and preferences.
I will start with an upside opportunity in FB stock but follow it up with two cautionary tales on DIS and ROKU. But before you send the posse after me for dissing two recent faves, know that if the FB upside scenario plays out this week or next then there is a good chance the other two won’t collapse.
The FB stock upside scenario is long term even though it can unfold in the short term as well. The fundamentals behind FB are very strong. Few companies have the earnings power and the dominance in its field. Those long Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) stock need to worry about FB’s momentum in online advertising. Customers of FB love it and swear that they’ve never seen anything comparable.
Technically, FB stock above $180 per share foretells much higher prices with an immediate target at $185 where it will encounter heavy resistance. A few weeks ago this zone was a neckline that caused a 7% correction in FB. Now it’s up to the bulls to prove they can retake it so that they can maintain the momentum going into the earnings.
I want to be long those earnings since I anticipate that the worries in FB stock are overstated. The upside potential is definitely larger than the downside risk based on today’s macro and micro fundamentals. A caution is that at 30 price-to-earnings ratio and 9 times sales it is not cheap. But this is still a growth company and for those, I don’t look for cheap. They are supposed to spend a lot in order to deliver the top line expansion.
It is also important to note that the technical momentum is not constructive on any time frame except the weekly. Going long here is to anticipate a positive outcome even though the short term charts signal some difficulties ahead. Long term, there is no doubt that FB stock will be higher if markets are higher. Those who held their stocks for the last few years more than double their money. Clearly there is upside momentum in spite of the fact that FB is now a political football going into an election year. After all is said and done, FB stock will survive the political pressures just as Microsoft (NASDAQ:MSFT) did decades ago.
Earlier this year ROKU stock went on an incredible rally. And relative to this level it may seem that it has bottomed. But today I want to caution against that notion as this could be a false bottom. ROKU stock is still up 253% year-to-date so there is definitely more froth to shed if necessary.
There is another sell trigger level just below recent lows. If ROKU bulls fail to hold them this week or early next then ROKU could fail and target $73 per share. While this is not a forecast, it is definitely a scenario that exists just below current levels.
Last week, Roku stock finished a 44% correction from the September highs. It bounced off $98 per share. From here, it is imperative that bulls hold it else sellers will pile in and trigger a bearish pattern that is looming. This has been pivotal all year so $98 is a neckline of what resembles a head and shoulder bearish pattern. If it triggers, then I bet that sellers will want to test the huge green candle from the May earnings reaction near $80 per share.
It is no secret that I have been critical of the ROKU fundamentals. But I have recently started to give it a little leeway due to the fact that Netflix (NASDAQ:NFLX) may have changed the environment for ROKU to prosper faster than it did 15 years prior. Nevertheless, there isn’t much meat yet on the bone. ROKU is still a frothy stock so if long I use tight stops so not to turn a bullish trade into an investment in trouble.
If the bearish trigger happens, then I can short it in the options market. Here too I would use tight stops as ROKU stock showed its might earlier this year and if markets rally it too can have a repeat performance.
Disney stock is closely related to ROKU this year from a trading perspective. They have both been stocks on fire. This is not to say that their fundamentals are close together. Far from it. DIS has excellent proven financial performance sheets and with a new source of income about to launch. Disney will start streaming content soon to compete with NFLX. ROKU is an aggregator so for now it’s not in direct competition to DIS. Between the two, I’d bet on DIS upside long-term. They have a more secure future based on past results.
But just like ROKU, DIS stock also has dangerous levels lurking just below current levels. And during a binary week this could make for a short opportunity. At the end of September, DIS stock lost an important neckline which in theory triggered a H&S bearish pattern that targets $120 per share. Interestingly, this would fill the gap from April’s massive spike. So if I am long Disney stock I should know that there is tremendous downside technical risk short-term.
The good news for bulls is that for the last two days, DIS has had a small bounce. But until the bulls retake the neckline and rise above $132 per share they are at risk from solidifying it as resistance going forward. Onus is on the bulls to change that fact and negate the bearish pattern already in progress.
Regardless of individual stock patterns, this week’s outcome is completely binary and anyone who has 100% conviction in their positions is lying to themselves. So whether short or long, traders need to place proper stop losses so not to suffer undue damages from the short-term headline perspective.