High-flying Roku, Inc. (ROKU) shares topped out above $175 in September and plunged 44% in the next three weeks, finding support in the upper $90s. The stock retraced about half the decline into last week and reversed once again, potentially trapping newly minted bulls. Even so, momentum plays often shake out both sides of the aisle before resuming their strong uptrends, making it harder to bet against the company in the coming weeks.

Bulls hope the upcoming flood of streaming alternatives reignites strong buying interest while they wait for this high-tech industry's inevitable day of reckoning. Millennials and the public cut the cord with traditional cable and satellite services earlier in the decade but have grown tired of paying endless monthly subscriptions that can be raised at a moment's notice, as Netflix, Inc. (NFLX) did earlier this year.

As a result, most of these a la carte services are destined to fail in the coming years, setting up Roku as a natural aggregator through a business plan ironically similar to cable and satellite. More importantly, Roku's hardware isn't tied to a limited service, like Amazon.com, Inc.'s (AMZN) or Apple Inc.'s (AAPL) Apple TV, giving Roku the flexibility to cut deals with all sorts of providers that will be watching their market share get crushed by a few big survivors. 

ROKU Weekly Chart (2017 – 2019)

Weekly chart showing the share price performance of Roku, Inc. (ROKU)
TradingView.com

The company came public in the mid-teens in September 2017 and rallied into the upper $20s just one session later. The subsequent downturn bottomed out in the upper teens in November, giving way to a momentum-fueled advance that stalled in the upper $50s in December. An orderly pullback ended in the upper $20s in the second quarter of 2018, setting the stage for a powerful uptrend that reached the upper $70s in October.

The decline into year end wiped out gains posted between April and October, finding support at $26.30 in December, while the subsequent recovery wave completed a round trip into the prior high in May 2019. The stock broke out immediately, posting two strong rally waves that reached an all-time high at $176.55 in September. Shareholders then headed for exits, dumping the stock through $100 while giving up 100% of the rally wave that started in August.

The sell-off completed a bearish "first failure" pattern, signaling an early warning for the end of the uptrend. However, a similar signal between March and December 2018 failed badly, with the stock hitting new highs within five months. We can't rule out a similar outcome this time around, but at a minimum, it warns market players to keep their stops tight and to take opportune profits, when offered.

The weekly stochastics oscillator crossed into a buy cycle earlier this month, predicting relative strength through most of the fourth quarter. So, while the October bounce reversed last week, Roku stock could easily post higher quarterly highs into November or December. Even so, short-term price structure argues against a rapid advance to the September high, suggesting range-bound action into the new decade.

ROKU Daily Chart (2018 – 2019)

Daily chart showing the share price performance of Roku, Inc. (ROKU)
TradingView.com

A Fibonacci grid stretched across the uptrend leg that started in December places the September low at the 50% rally retracement, while the short-term bounce reversed at the 50% sell-off retracement. This symmetry is bringing the 50-day exponential moving average (EMA) into play once again, with buyers likely to buy the dip into $120 or so. In turn, the rally could then fill the Sept. 18 gap between $145 and $150, reaching the .618 sell-off retracement level.

That buying spike could end the bounce because the on-balance volume (OBV) accumulation-distribution indicator is painting a bearish picture, also warning that Roku stock is unlikely to test the September high at this time. The indicator posted a new high with price and turned lower into year end, while 2019 buying pressure is barely visible on this daily view. OBV is also dangerously close to the prior low, with little selling pressure needed to trigger a major decline.

The Bottom Line

Roku stock has bounced strongly off September lows, but weak accumulation suggests that the current uptick will end soon

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