Roblox Is a Buying Opportunity as the Earnings Gap Fills

Attention, Roblox (NYSE:RBLX) lovers: A lucrative buying opportunity is in the offing. It will be one of the best chances for new bulls to enter the videogame maker since the company went public last year. Today’s arguments will appeal to followers of both fundamental and technical analysis. Though, we’ll rely a great deal more on the latter to make our case for purchasing RBLX stock.

A child playing Roblox on a smartphone.

Source: Katya Rekina/ Shutterstock.com

But it’s not just Roblox in isolation that makes for a compelling pitch. The entire growth area of the market may have just seen a washout, which could help spell a bottom for its lengthy downtrend. Roblox boasts all the characteristics of a growth stock, and its fate is thus intertwined with that factor. What’s good for one is good for the other, so it pays to analyze both.

If you’ve been following Roblox long and didn’t own shares in the fourth quarter of 2021, think back to how you felt when the stock exploded higher following November’s earnings release. Within a few weeks, prices nearly doubled amid massive accumulation. Legions of watchers looked on with envy, wishing they had acquired shares before the report.

If you’re one of them, I have good news. On Monday, RBLX stock came within a whisker of filling November’s gap. And just like that, you now have the chance to gobble up shares at their pre-gap levels.

RBLX Stock Chart

Roblox (RBLX) weekly chart with pivot low formed.

Source: The thinkorswim® platform from TD Ameritrade

The weekly chart shows just how far prices have retreated since last year’s peak of $141.60. At Monday’s lows, we were 44% off the highs. The retreat returned prices to the well-established base that sat for months before the earnings explosion.

Since we only have about a year of data, there aren’t many moving averages to add to the big picture analysis. We’ve fallen below the 20-week moving average but are still above the significant support pivots that have formed since the initial public offering (IPO). Given the bevy of potential floors now looming closely, it’s unlikely prices will continue to crater.

Moving to the daily view does make the last two months appear nastier than they do in the weekly view. RBLX stock has cracked below the 20-day, 50-day and even 200-day (however briefly) moving averages along the way.

Distribution drove the descent, and every bounce along the way failed miserably. But, I’m encouraged by Monday’s reversal at the gap fill zone. We ended with a rousing hammer candle that was echoed by the entire market. Tuesday’s upside follow-through provides additional confirmation that buyers are returning for a second day in a row.

Roblox (RBLX) daily chart with gap fill

Source: The thinkorswim® platform from TD Ameritrade

That said, the daily trend is still down, so if you want more definitive signs that it’s reversing higher, then patience is warranted. It will take time for the pivot relationships to shift from down to up. The premise for today’s trade idea is that the weekly dip will ultimately get bought, and the daily trend will find a bottom sooner than later.

As for the fundamental case, the share price just got slashed nearly 50% from the peak. So, unless you think the earnings growth dropped a similar amount, the stock is trading at a much lower valuation.

The Growth Stock Washout

For analyzing the potential washout in growth stocks, we turn to the Ark Innovation Fund (NYSEARCA:ARKK). It’s become extremely popular over the past two years and is as good a proxy for high-multiple growth stocks as any. Though, admittedly, the multiples are a great deal less now that traders cut the fund in half.

Ark Innovation Fund (ARKK) stock chart showing signs of capitulation.

Source: The thinkorswim® platform from TD Ameritrade

The correlation between RBLX stock and ARKK has been running hot, so it will be difficult for the former to rise if the latter continues to sink. Fortunately, ARKK formed a high-volume hammer candle and is climbing on Tuesday.

What’s more, the level of distribution seen over the first two weeks of the year looks like the type of capitulation seen near the end of a move. Time will tell, but I find the signs at least supportive for wading into the waters with RBLX stock.

The Options Spread for RBLX Stock

Consider starting to dollar-cost average into RBLX stock at these levels. I like scaling-in to provide multiple chances to buy near the bottom in case the first attempt fails. Alternatively, you could purchase longer-term call spreads for a lower-cost bet.

The Trade: Buy the April $90/$105 bull call spreads for $5.10. You’re risking $5.10 to make $9.90 if RBLX rises above $105 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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