Stability has returned to Roku (NASDAQ:ROKU) shares after one heck of a sinking spell. But whether this is just a bottom or the bottom remains to be seen. High-growth stocks elsewhere are also attempting to carve out a low, but we’re still in the early innings, so patience is warranted. That said, ROKU stock and friends are participating in this week’s rebound, and Santa Claus is inbound. So I consider the chances for a nice ramp into year-end to be good.
In setting the stage for potential trades, it’s worth first surveying the trend of the Ark Innovation ETF (NYSEARCA:ARKK). Roku is currently the second-largest holding of the actively managed exchange-traded fund at approximately 6%.
The other holdings are a who’s who of high-multiple, high-growth stocks that have struggled mightily in 2021. Perhaps no other fund captures the drama surrounding this market segment this year. If you want to make a bullish case for Roku, it will undoubtedly help if ARKK confirms.
Is Ark Done Sinking?
ARKK came within a whisker of notching a new 52-week low at Friday’s lows. But, fortunately, buyers swarmed to defend the old pivot, and support held firm. From peak to trough, the fund has fallen 44% this year.
Meanwhile, the S&P 500 is up 27%. The contrast couldn’t be more significant, and it speaks to just how epic the unraveling in this area of the market has been. Nonetheless, with Friday’s successful support test and this week’s subsequent bounce, ARKK is trying to carve out a double bottom pattern.
It’s entering Thursday’s session with a test of the declining 20-day moving average. Pushing above that is a necessity to keep bulls’ hopes alive.
Completing the double bottom setup requires a break above the $104 resistance zone. Ultimately, that’s the line in the sand that will turn the tide of the short-term trend and give Roku’s reversal attempt a better chance at success.
A Closer Look at the ROKU Stock Charts
The weekly time frame illustrates the gravity of Roku’s rise and fall from grace. Thus far, its descent has matched the pace and magnitude of its ascent in a feat of beautiful symmetry. Of course, bulls are hoping the mirroring stops here before we fully retrace last year’s rise. I think they have a shot, but the technicals remain muddy.
Old resistance at $175 beckons as the obvious next floor. Should the current bottoming attempt fail, consider this the downside target. The last two weekly bars show quite the battle transpiring between buyers and sellers. This is the first time that significant accumulation has come into the stock in a long time.
The daily view shows prices still below the 50-day and 20-day moving averages. Sure, we held the $200 support on a closing basis last week, but the upside follow-through has lacked momentum. And that, ultimately, is the piece that’s lacking for the bullish argument. Holding support is good; breaking resistance is better. And so far, we haven’t done the latter.
But I’m not opposed to prepping a trade in case we eventually do. I suggest using either a breach of $239 or $266 as your trigger. The second one provides more confirmation and a break of the 50-day moving average.
Call Spreads Offer a Cheaper Bet
Given the stock’s triple-digit price tag and sky-high options premiums, I like using call spreads if we can break above either resistance mentioned above.
The Trade: Buy the Feb $250/$270 for around $6.
You’re risking $6 to make $14 if prices climb beyond $270 by expiration.
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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