PreMarket Prep Recap: Roku Downgrade Makes Markets Go Cuckoo

If you didn't listen to Monday's PreMarket Prep Show, then you may be clueless as to why market is under selling pressure in today's session. The reason being on each and every broadcast we attempt to identify the potential catalysts that will drive the price action upcoming session.

Sometimes it can be an earnings report from a major company or a Trump tweet.

Today's catalyst for the decline was a direct result of a change in rating from a Wall Street analyst. Also, Commerce Secretary Wilbur Ross said Monday President Trump is prepared to levy more duties on Chinese goods in the absence of a trade deal.

In One Day Roku Goes From Momo To No-No

Morgan Stanley downgraded Roku Inc ROKU to Underweight, which is the equivalent of a Sell rating, with a price target of $110.

The reason for the change being so impactful is because many were primed for the issue to make a new all-time high ($176.55). And for good reason, as the issue had been on a monster run since bottoming in October at $98.08, along with the upcoming holiday season.

Now with a sudden turn in momentum, late-comers to the rally may not have had an exit plan to combat a $14 lower open. Therefore, they have two choices: swallow the loss or wait for a rebound that may or may not materialize.

As a result of those who hesitate to immediately eat the loss, they will place orders to mitigate the loss or break-even. This creates an overhang supply that will come down lower and lower until executed.

For example, some may wait for Friday's closing price ($160.37), which was $15 away on the open. In other words, the longer it takes the issue to recover, the lower the offers will go.

The Multiplier Effect

Although not all momentum stocks are created equal, they often move together in both directions. While Roku was catapulting from $100 to nearly $170, issues such as Shopfiy Inc SHOP went along for the ride rallying from its November low ($282.08) to $344 on Friday.

With the sudden momentum change in Roku, Shopify is following suit, down $20 on the session and creating yet another "overhead supply" scenario.

Other Factors For The Retreat

Is the trade war with China really over? With the Dec. 15 tariff deadline approaching, investors and money managers have to consider the impact if a deal isn't reached or even scrapped for the time being.

Large market participants may also lighten up positions ahead of key economic data. On Friday, November's jobs data will be revealed and who knows who the market will react to it, good or bad. Will recession fears be stoked once again on a weak number or inflationary fears or a "hot" number that may lead to the next interest rate move being a hike in rates?

Anne-Marie Baiynd Joins The Show

Early in the broadcast, Anne-Marie Baiynd, author of the The Trading Coach was our guest. When prompted, she laid out her potential short side scenario for the S&P 500 index futures.

On Tuesday at 8:35 a.m. EST, Nic Chahine, author of Create Income With Option Spreads will survey the technical damage from Monday's session and lay out his parameters for a swift rebound to new highs or a blueprint for a continued correction.