Roku (NASDAQ:ROKU) has settled into a choppy range, frustrating trend traders and others who thrive off of follow-through. Fortunately, consolidation zones carve out easy-to-identify support and resistance levels that you can trade from. Today we’ll provide a technical take on the ROKU stock chart, layout potential scenarios to prepare for, and suggest how to play them.
One of the characteristics that make ROKU a favorite among active traders is elevated volatility. It belongs in the pantheon of high-growth stocks alongside the likes of Advanced Micro Devices (NASDAQ:AMD), Nvidia (NASDAQ:NVDA), and other movers and shakers.
To put the volatility in context, the S&P 500 index carries a 20-day historical volatility of 7% right now. In contrast, ROKU’s volatility over the same time has been 51% or more. This is why momentum lovers flock to the name, and it’s why ROKU offers attractive premiums to options sellers.
Big Picture
The weekly time frame reveals Roku’s rapid growth since its late-2017 IPO. Shares of the company have risen some tenfold from their lows but have settled into a pausing pattern. Over the past quarter, a symmetrical triangle has formed, suggesting a stalemate between bulls and bears. The lines have been drawn and it’s now just a matter of waiting for resolution.
If we don’t get a break in the next few weeks, then the Feb. 17 earnings report is likely to provide the catalyst needed to decide the victor. Given the trajectory of the long-term trend and the tendency of consolidation patterns to resolve themselves in the direction of the dominant trend, don’t be surprised if the inevitable break is higher.
The weekly levels to watch are $150 and $120. Until we breach either level, I’m neutral on this time frame.
Daily Time Frame
The neutrality spills into the daily time frame and is confirmed by the crisscrossing moving averages. The 20-day has rotated below, above, and then back below the 50-day over the past quarter. ROKU stock’s current perch beneath both averages should give buyers pause while emboldening sellers.
That said, I find Monday’s hammer candle at support reason for optimism in the near-term. At a minimum, ROKU stock traders should wait for a break of Monday’s lows before deploying short trades. Support at $127 is holding firm despite multiple tests and we’ll want to see it fail before bear plays are worth it.
Volume isn’t providing many clues one way or the other. It’s been subdued since Dec. 2’s down gap, making it difficult to weigh in favor of either side here.
Two Trades for ROKU Stock
With Monday’s support test, I can see two potential scenarios worth trading — one bull and one bear.
If you’re willing to bet on $127 holding and Monday’s rally pushing toward resistance near $143, then sell the 14 Feb $120/$115 bull put spread for around $1.31. You could use a tight stop below the day’s low or bail on a breach of the short strike at $120. The potential return on investment is 36%, and the probability of profit is 75%.
If you think Monday morning’s strength is a ruse and want to bank on a breakdown, then wait for a close below the day’s low ($126.30). Once we have that confirmation, bear put spreads offer a cheap way to play the downside. Buy the Feb $125/$120 bear put spread for around $2.50.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!
