Momentum swings in both directions. Last week, we woke up to Roku at a 20% drawdown in a single trading day. In fact, within 2 weeks, Roku’s price has fallen 39% from its all-time highs. If you are new to Roku, it would be easy to panic. However, for those that have been involved with Roku from its IPO didn’t even flinch. Within 2 years of trading, Roku has had 3 drawdowns of around 50% from peak to trough. The largest drawdown has been 64.47%, and without a strong conviction, there’s no way an investor could sleep while holding Roku for the long haul.
Whenever we see the market get it wrong, again, on Roku, and the technical break significant support, as a Roku investor, I don’t get afraid, I get excited. It’s times like these that I look to add to my Roku position as I have personally outlasted every Roku drawdown since it went IPO. The point of this report is to gauge the probability of Roku’s current drawdown, which can act as a reasonable point of entry.
Elliott Wave
Roku’s impulsive chart pattern is unfolding nicely. My primary count has us completing a blow-off top 3rdwave, highlighted in the blue numbers, where the explosive 3rdwave, with peak technical momentum, pierced the upper range of the trend line. We are currently starting the 4thwave down and when we zoom into the 1-day waterfall event, we can see a clear 5-wave pattern down, insinuating a 5-3-5 correction is underway. I estimate this correction will take us to the 50% – 61.8% retrace level ($96-$77), after we get a corrective bounce.
These levels not only coincide with the trendlines developing, but they also coincide with the 100% extension and the 78.6% extension. I see this area as a strong region to expect the pullback to find support, and depending on the broad market, could be an excellent place to add to, or begin building a position.
Basic Technical Analysis
Some of my favorite gauges for market health and actionable decision making is based on basic trendline/momentum data.
First off, I anchored a Volume Weighted Moving Average (AVWAP) to the December low, which is the momentum line highlighted in pink. This moving average clearly shows that, even with a near 40% drawdown, the bulls are still in control. This moving average lines up perfectly with the 200-Day moving average, highlighted in blue. These 2 levels will act as major support as they move into the targeted support ranges, strengthening the support within this region.
Moving onto the broken support regions, you’ll will notice the 3 separate tops (one of which we are currently experiencing). Below these tops you’ll notice the line in the sand support region, highlighted in dotted black. Roku has definitively broken through the current support, after breaking a significant trend line, also highlighted in black. Notice the red arrows. There are 3, all lining up with the exact moment the RSI, MACD and price broke their respective trend lines from the December low.
I would urge you to be cautious trying to buy the dip too soon in Roku. I do believe we will see a corrective bounce from over sold levels, but I expect it to be corrective before we see the final drop into the 50% – 61.8% retrace zones. You’ll notice the histogram in the MACD, dropping to levels we have never seen with Roku. When we see such a sharp drop in the MACD, more times than not, it’s an indication of too soon, too fast, which leads to the very least a bounce. Also, you’ll notice that the RSI is right on the 30 line, indicating oversold levels as well.
However, while we are looking at the RSI, I want you to notice how many times the RSI broke the 40 line, which in a bull market the RSI will usually not break, and then dropped to the 30 line. Three times this occurred, and 2 of those time lead at least a 50% drawdown. I use this as further evidence to hold off on adding to Roku at these levels.
In conclusion, I believe the $96 level will be the next support region that Roku will react to. It’s due for a bounce, I’m expecting at minimum to the $115-$120 region, but this bounce should be corrective before we drop to the 61.6% region. I will look to add to my position around this price cluster.