Roku Stock in Rocket Mode After Bullish Quarter

Roku, Inc. (ROKU) is proving that momentum is alive and well on Wall Street, rocketing more than 40% in four sessions after last week's stronger-than expected earnings report. The stock pulled back about 12 points in two sessions after reaching $142 while bulls circle the wagons, looking for the best price to "buy the dip." That signal could come soon because the downturn has reached within 10 points of support at the top of Thursday's breakaway gap.

The smart TV platform provider beat second quarter profit estimates by 12 cents per share but still lost $0.08 per share, while revenues rose an impressive 59.5% year over year to $250.1 million. The company expects rapid growth to continue well into the new decade, raising third quarter and fiscal year 2019 revenue guidance above current expectations, but Roku didn't tell investors when it will finally post a profit. 

A wave of upgrades followed the earnings report, with Stephens, Rosenblatt, and Needham jumping on board the bull train. Price action has been especially impressive given this week's broad-based rout, triggered by an escalation in the U.S.-China trade war. Roku isn't immune from higher costs coming online as a result of tariffs, but CEO Anthony Wood told CNBC that the company is taking steps to mitigate exposure by relocating manufacturing facilities.

Bullish action also followed May's first quarter report, with the stock gaining ground for six weeks before stalling just above $100. That bodes well for higher prices through September, despite the month's well-deserved bearish reputation, offering opportune profits for the momentum crowd. On the other hand, disciplined investors should probably sit on their hands for now because the stock has risen nearly five-fold so far in 2019, pushing the valuation envelope to an extreme.

ROKU Daily Chart (2017 – 2019)

The company came public in the teens in September 2017 and surged into the upper $20s before turning tail in a slow-motion decline that held above the IPO opening print. It turned sharply higher in November, mounting the first rally high in a vertical impulse that topped out at $58.80 in December. An August 2018 breakout stalled in the upper $70s in October, ahead of a downturn that cut through new support, dropping the stock to a 13-month low in the $20s at year end. 

It has been all upside since that time, with a rally wave into March reaching within five points of the October high, while a May impulse finally mounted resistance, lifting the stock into a series of all-time highs, including Tuesday's print at $142.10. The on-balance volume (OBV) accumulation-distribution indicator has surged to a new high as well, signaling broad-based sponsorship that can support even higher prices.

ROKU 60-Minute Chart (May – August 2019)

The breakout stalled at the 2.618 Fibonacci extension of the trading range into August, which is a common reversal zone for a momentum-fueled uptick. A second grid stretched over the rally since Aug. 6 places the top of the breakaway gap at the .50 retracement near $119, marking a high-odds entry zone for deep pullback strategies. Although market lore tells us that "gaps get filled," the breakaway variety rarely gets filled quickly, so that shouldn't happen right now.

Traders can also use the 50- and 200-hour exponential moving averages (EMAs) to identify low-risk entry prices, in combination with hourly stochastics. Right now, the oscillator has entered a buy mode that could easily lift price to $135 before the next selling wave offers a more potent buying opportunity. Looking back, the stock bounced along the 50-hour EMA for more than a month after May's confessional, suggesting that the first hit at that level will be a profit maker. 

The Bottom Line

Roku stock is engaged in a powerful momentum-fueled uptrend that could offer opportune profits in a tough summer market.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.