Roku, Inc ROKU opened Friday’s trading session down over 22% after reporting an earnings miss. The streaming service and digital media company also issued weak guidance for the third quarter.
For the second quarter, Roku reported a quarterly loss of 82 cents per share on sales of $764.41 million, which missed the consensus estimate of a 68 cent loss on revenues of $805.64 million.
The sharp gap down accelerated Roku’s downtrend, which the stock confirmed on July 26, when it printed a lower low.
A downtrend occurs when a stock consistently makes a series of lower lows and lower highs on the chart.
The lower lows indicate the bears are in control, while the intermittent lower highs indicate consolidation periods.
Traders can use moving averages to help identify a downtrend, with descending lower timeframe moving averages (such as the eight-day or 21-day exponential moving averages) indicating the stock is in a steep shorter-term downtrend.
Descending longer-term moving averages (such as the 200-day simple moving average) indicate a long-term downtrend.
A stock often signals when the lower low is in by printing a reversal candlestick such as a doji, bullish engulfing or hammer candlestick. Likewise, the lower high could be signaled when a doji, gravestone or dragonfly candlestick is printed. Moreover, the lower lows and lower highs often take place at resistance and support levels.
In a downtrend the "trend is your friend" until it’s not and in a downtrend, there are ways for both bullish and bearish traders to participate in the stock:
- Bearish traders who are already holding a position in a stock can feel confident the downtrend will continue unless the stock makes a higher high. Traders looking to take a position in a stock trading in a downtrend can usually find the safest entry on the lower high.
- Bullish traders can enter the trade on the lower low and exit on the lower high. These traders can also enter when the downtrend breaks and the stock makes a higher high, indicating a reversal into an uptrend may be in the cards.
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The Roku Chart: Although Roku is trading in a downtrend, a bounce up at least to print a lower high is likely to come over the next few days. First, the gap down caused Roku’s relative strength index (RSI) to plunge toward the 30% level, putting the stock near oversold territory and secondly, gaps are about 90% likely to fill, making the possibility of a surge toward the $84 level likely at some point in the future.
- On Friday, Roku also printed a dragonfly candlestick on the daily chart, which is often found at a temporary bottom and can indicate a bounce to the upside is imminent. It should be noted that daily candlesticks can be lagging indicators, and Monday’s candlestick will need to print for confirmation.
- Another likely scenario for the week ahead is that Roku will trade sideways on decreasing volume, which could indicate the stock is slowly running out of sellers. Friday’s drop was made on much higher-than-average volume, which indicates the bears are in control.
- Roku has resistance above at $72.83 and $81.76 and support below at $61.50 and $55.88.
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