Roku (NASDAQ:ROKU) shares have fallen over 38% since reaching an all-time high near the end of July. The decline has been swift and highly consistent. Bulls have been held at bay the entire time, but a significant support test now looms. How traders respond here will have big implications on Roku stock for the rest of the year.
Today’s commentary aims to bring attention to this price zone and map out ways to build trades around it.
ROKU Stock Charts
“M” stands for murder because it kills the trend. Consider this the headline for Roku stock’s weekly chart. This year’s monster volatility has culminated in a huge double top pattern that is now on the brink of completion.
Ultimately, it comes down to how prices respond to the current support test at $300. Hold here, and the big picture remains neutral, and we can say that prices are in a sloppy trading range that was desperately needed to digest the eye-popping gains from 2020.
But if we break, things take on an even more bearish tone. For starters, the next significant floor isn’t until around $200, so there’s the potential for large losses to ensue. Second, overhead supply would be a serious force moving forward. Many investors are long Roku above $300 and will be underwater if we break below it. Their desire to get back to break-even will make it challenging for prices to climb.
That said, patterns fail all the time, so I don’t want to be overly dramatic about the bearish implications here. This is also why stop losses and exit strategies are essential for anyone building bearish trades around the support break.
The daily chart provides more context for Roku’s descent. Ever since the July peak near $500, prices have been gliding lower. We now find ourselves submerged beneath all major moving averages. Bears rejected the last two rally attempts at the declining 20-day. Breaking above it will provide a much-needed bullish signal that the tide could be turning.
The timing of today’s focus on Roku coincides with a compelling 4% jump in the share price. The gains are coming, mind you, while the S&P 500 is down 1%. It’s a welcome bout of relative strength for a stock that has seen anything but muscle flexing for months. We still need to get above the 20-day, but I consider this a promising start to the $300 support test.
Pick a Side and Play
The significance of support makes it easy to build trades right now using an “if, then” model. For example, if Roku holds above $300, then bullish trades banking on a trend reversal have a shot. On the other hand, if Roku doesn’t hold $300, then deploying new bear trades makes sense.
I like using Dec bull call spreads to provide more turnaround time if we stick the landing here.
Bull Trade: Buy the Dec $320/$340 bull call spread for $5.75.
You have the potential to make $14.25 if Roku stock climbs above $340 by expiration. Consider exiting on a break below $280 to minimize the loss.
If Roku takes out the near-term pivot low of $295, then swing away on bear plays.
Bear Trade: Buy the Dec $290/$270 bear put spread.
The price is currently $10.21 but will be higher by the time the stock triggers. So you can modify the strikes to fit your price preference at that point.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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