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Roblox Drop Has a Silver Lining

Roblox (NYSE:RBLX) shares are on the ropes after the popular video game company released underwhelming daily active users for May. Though the fundamentals provide a reason for some to jump ship, there is a silver lining to Wednesday’s -9% drubbing. RBLX stock prices have returned to a major potential support zone, giving us the first great buying opportunity since last week’s epic breakout.

Roblox Stock IPO
Source: Miguel Lagoa / Shutterstock.com

Let’s take a closer look at the company’s updated numbers. Then, we’ll break down the RBLX stock chart and layout an options trade idea.

If you want the full rundown of the freshly released business metrics, you can find them here. Fundamental analysis isn’t my area of expertise, but a stock getting slammed nearly 10% when daily active users only tick down 1% from the prior month seems like an overreaction. That, coupled with the stock sitting at an exciting area, makes for a compelling bullish trade idea.

RBLX Stock Chart

After its IPO, Roblox shares spent two months building a trading range. Along the way, the company also released its first earnings announcement,. This delivered a shot in the arm, which ultimately sparked an upside breakout. In gauging the legitimacy of a breakout, I look at three filters: price, volume and time.

Roblox (RBLX) stock chart with key support test.
Source: The thinkorswim® platform from TD Ameritrade

The $80 break led to a push to $103.87. That’s a roughly 30% gain in the stock in a little over two weeks. Price undoubtedly confirmed the resistance break.

On the volume front, we saw a quartet of above-average volume bars in the back half of last month. The accumulation signals big buyers were entering the fray, making it all the more likely that they would defend their turf on any attempt to reverse the break. Consider the volume filter as providing a green light also.

Finally, we have time. May 21 was the breakout bar. Here we are nearly one month later, and prices are still north of the $80 ceiling. Enough time has passed to validate the breakout’s legitimacy.

I’m always a fan of buying retracements after legitimate range breaks. And, though RBLX stock has been a bit volatile during its descent, its current pullback still qualifies.

The principle of polarity states that old resistance acts as new support. Now that we’re testing the topside of $80, I fully expect buyers to emerge and a floor to form. If the horizontal support wasn’t reason enough, we’re also at the rising 50-day moving average. This smoothing mechanism has a reputation as a gathering ground for dip buyers.

As interested as I am in playing the potential support bounce, Wednesday’s candle is difficult to build trades around. It was a wide-range bar that ended near the middle of the session – a doji candle, in other words. It will be helpful if we can get another candle that is smaller to provide a cleaner entry. Waiting for a break of a prior day’s high is a smart trigger.

Game the High Volatility With a Credit Spread

The higher volatility of RBLX works to the advantage of option sellers. If you’re willing to wager RBLX stock can remain above $70 for the next month, then consider the following bull put spread.

The Trade: Sell the July $70/$65 bull put for 76 cents.

The max gain is limited to $76 per spread. The max loss is $424 per spread. To minimize the risk if Roblox stock continues to fall, exit on a push below the short put strike at $70. That should reduce the loss to around $140.

On the date of publication, Tyler Craig had a LONG position in RBLX. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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Article printed from InvestorPlace Media, https://investorplace.com/2021/06/rblx-stock-roblox-drop-has-a-silver-lining/.

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