Riding the Stock Market Waves: Technical Update on Roku (NASDAQ: ROKU)

Produced by Jason Appel
“From a fundamental point of view, Roku (NASDAQ: ROKU) the rating has been completely reset. It is now below average in terms of average valuation and continues to have robust growth” – Lyn Alden from her 2/12 article, “Where Fundamentals Meet Technicals: ROKU, MELI”

Granted, ROKU’s valuation reset was not a backyard bull market pullback. Instead, ROKU has fallen 79% from its all-time high in July 2021 and the recent low of $102.60 reached on February 18. The company’s price-to-sales ratio fell from a dazzling 33+ to 5.5. What changed?

Note that revenue continued to grow amidst this share price drop. Fourth quarter 2021 revenue beat analysts’ expectations by 3.2%. However, on the positive side, net revenue increased 55% year-over-year in 2021 and gross profit increased 74%. As for the outlook for 2022, the expectation of global supply chain disruptions will likely reduce TV sales, which will negatively affect ROKU’s account growth, but due to increased advertising, from content promotion and content distribution, total sales are expected to increase by 35% (specifications from the recent Q4 2021 Letter to Shareholders).

From a technical point of view :

ROKU has had 3 waves since its inception. Although the structure does not meet the conditions for an Elliott Wave impulse, it does appear to form a larger diagonal. As expected from a diagonal, the pattern still favors another rally to a new all-time high over the next few years to fill the 5th wave.

A diagonal is a 5-wave pattern in which the sub-waves: (1)-(2)-(3)-(4)-(5) are each composed of 3 wave motions, labeled ABC. Although it is still a trend pattern, it does not look like an impulse both in its internal structure (in impulses, waves (1), (3) and (5) consisting of 5 sub-waves) and the tolerance of a deep wave (4) recoil, even allowing an overlap in the territory of the wave (1). So far, the price has held non-overlapping with (1) and overall this pullback, although huge in percentage terms, has only pulled back a little beyond the 50 retracement % of the wave (3). In Fibonacci terms, that’s pretty standard for the diagonal (4) wave.

In terms of the microstructure, unless price rallies above $180 sustainably, I cannot rule out another low targeting the $80 region to fill out a fuller C wave.

That said, as long as ROKU is able to avoid any sustained break below $58, another all-time high is favored to complete the expected larger wave (5) structure. As such, while large positions are premature without a decent confirmation of a bottom (which would be accompanied by a sustained break above $180), small initial positions offer decent risk-reward; if the sellers were to take advantage of lower lows down to $80, such a development would offer magnificent risk-reward.

Finally, although technical data should be considered secondary to price action, the MACD makes successively higher lows with each new price low. In other words, we have nice positive divergences on the daily chart.

Again, as long as the price is able to avoid any sustained break below $58, the next rally should set in. As mentioned above, Price to Sales fell from 33 to 5.5 in a thriving business that expects continued growth. What changed ? Likely feeling. This is exactly what is expected in line with a wave (4) and is what gives investors a chance to buy low for wave (5) when sentiment rises again.