Streaming platform Roku, Inc. (ROKU) has failed to benefit from the second quarter's broad-based recovery effort and has rolled over, raising the odds for a steep pullback that has the potential to reach March's 11-month low. It's hard to pinpoint the catalyst for recent selling pressure, with a single Wall Street downgrade and a 4 million-share equity offering the only obvious negatives in the past month.

However, Roku topped out on May 7 and sold off nearly 8% in the next session despite beating first quarter 2020 revenues estimates by a wide margin. A 55.2% year-over-year revenue increase to $320.77 million failed to inspire buying interest, perhaps because the company also reported a net loss of $0.45 per share. Roku stock has continued to lose ground since the report and is now trading more than 30 points below the recovery high.

The May confessional also admitted that second quarter advertising revenue was unlikely to meet guidance, despite a 30% growth in April accounts. The potential shortfall highlights the company's cyclical vulnerability, with ad revenues traditionally growing during periods of economic expansion and falling during recessions and downturns. Reopenings around the globe may also be undermining buying interest, with folks having less time for home entertainment.

ROKU Weekly Chart (2017 – 2020)

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 reversed near $30 in the next session. A slow-motion pullback held above the IPO opening print into November, when a momentum-fueled advance set into motion, tripling the stock's price in just six weeks. The subsequent downturn posted a higher low in April 2018, giving way to renewed buying interest that completed a round trip into the prior high in August.

An immediate breakout stalled in the mid-$70s two months later, ahead of a decline that undercut the April low by nearly three points at year end. It recovered those losses into May 2019, completing a cup and handle breakout that yielded impressive buying power into September. The stock posted an all-time high at $176.55 at that time and rolled into a persistent trading range with support in the upper $90s.

Price action held within those boundaries into March 2020, when the pandemic-driven somersault sliced through range support before carving a successful test at the May 2019 breakout in the $70s. The second quarter bounce remounted broken support in an April 14 gap between $97 and $102, but the rally reversed at the developing trendline of lower highs on May 7, highlighting resistance that now marks the dividing line between bull and bear power.

The weekly stochastic oscillator dropped into the oversold zone after a week-long bounce failed to clear 50-week exponential moving average (EMA) resistance, but it is showing no signs of crossing into a new buy cycle. However, bears need to act defensively at this juncture because the downtick since early May is now approaching the April gap and reinstated range support, raising the odds that buyers will soon come off the sidelines.

ROKU Daily Chart (2019 – 2020)

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

The on-balance volume (OBV) accumulation-distribution indicator topped out with price in September and entered a distribution phase that has also posted a string of lower highs. OBV is now dangerously close to the March low, highlighting weak second quarter buying power despite the bounce of 80-plus points. At a minimum, it warns traders and investors to stand aside for now, awaiting elusive buying signals.

The nine-month pattern could be the final arbiter in this complex set-up because it has carved a descending channel that has now resisted three breakout attempts. At the same time, this week's selloff at the narrowly aligned 50- and 200-day EMAs places bears in charge of short-term price action, raising the odds that the stock will fail to hold horizontal support despite April's breakout. A breakdown is likely to increase selling pressure once again, increasing vulnerability to a trip back to the first quarter low.

The Bottom Line

Committed bears are now controlling Roku price action despite the second quarter's impressive recovery.

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