Following an analyst downgrade and dramatic reaction worthy of ratings gold for CNBC, is Roku (NASDAQ:ROKU) a buy? Let’s take a look at what’s happened off and on the price chart to come up with a stronger risk-adjusted determination for ROKU stock in the weeks ahead.
Most stocks had a tough go of it in Monday’s session. Renewed tariff concerns against China and the EU rekindled well-doused trade war risks of late. The threats sent the broader market backtracking to its largest loss since bottoming in October.
But while large caps — from Apple (NASDAQ:AAPL) to Boeing (NYSE:BA) and Micron Technology (NASDAQ:MU) — came under obvious pressure, over-the-top device giant ROKU was the session’s cinematic equivalent of a rotten tomato for bulls. Shares tumbled 15% following a decisive downgrade and warning from broker Morgan Stanley.
Analyst Benjamin Swinburne reduced Roku stock to underweight from equal-weight while lowering his below-market price target from $120 to $110. The cut also warned of “overall exuberance over all things streaming”, rich sales multiple relative to Netflix (NASDAQ:NFLX) and risks to growth expectations not reflected in ROKU stock price at current levels.
But was Monday’s hard-hitting sell-off in ROKU, tomorrow’s bargain? CNBC’s Fast Money appears to think so. Stephen Weiss bought shares while muttering “support” and sidekick Jim Lebentahl offered an odd “looks like it’s already turned.” I can’t say I’m a fan. And after tuning into the ROKU stock chart, I’m also left wondering if hosting opportunities on Comedy Central are available for the Fast Money guys?
ROKU Weekly Chart
A couple sessions after Roku’s mixed November earnings report cratered shares ,I warned strength in ROKU stock price would only benefit bears looking to short shares. And with Roku near $133 and trendline resistance, a deeper correction and shorting ROKU stock looked very approachable. The forecast proved 100% wrong.
Shares of ROKU continued to rally strongly. First and quite easily, trendline resistance failed. Roku’s pre-earnings closing price was then eclipsed. Finally and over the next couple weeks a series of three higher-highs spitting distance from ROKU stock’s September all-time-high was formed. Then along came Morgan Stanley.Source: Charts by TradingView
It’s our contention that Monday’s third breach of ROKU stock’s most aggressively positioned trendline shouldn’t be discounted. In conjunction with a lower-high topping candle now firmly in place and bearish stochastics crossover, a larger corrective “W” or double-bottom pattern could easily find shares challenging the September low.
Bottom Line on ROKU Stock
It’s not all bad for bulls. Even in healthy markets, equities like ROKU stock correct all the time, before ultimately trading higher. It’s how you prepare for the inevitable that matters most. And if this month looks remotely like 2018’s December-to-remember, watch out below. Conditions like that could result in a deeper pattern test of $80-$85 before all is said and done.
That would spell opportunity for those erring smartly on the side of caution today.
Disclosure: Investment accounts under Christopher Tyler’s management currently own positions in Micron (MU) and its derivatives but no other 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 market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.