ROKU Chart Analysis, Beware Stage 4 Downtrends

ROKU was one of the top performing stocks in the 2020 Bull Market, advancing 730% from March lows before ultimately rolling over and giving it all back in the recent Bear Market.

In this quick article we will discuss this lifecycle and why you should always avoid stocks that begin Stage 4 Downtrends.

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Before we talk about the recent decline from all time highs, let’s cover what led to ROKU’s impressive performance.

ROKU bottomed before the rest of the market as leaders tend to do and moved up quickly towards all time highs as it completed the right side of a long consolidation phase.

The moving averages shifted from resistance to support as it formed a 1st stage base and broke out near 138.

As it trended above a rising 200 SMA it met the criteria of a Stan Weinstein Stage 2 Uptrend.

Throughout its trend ROKU showed clear respect for the 50 SMA and formed a 2nd base and a 3rd. Classic Accumulation.

Then, ROKU finally lost respect for its 50 SMA and started a much deeper and looser base. This was the fourth stage base in its uptrend which qualifies as a late stage base.

At this point on the right hand side we can see a failed breakout and then an undercut of the 21 EMA, 50 SMA, and even the 200 SMA. These are 4 distinct warning signs that ROKU’s run may be over.

At this point ROKU was oscillating above and below a rising 200 SMA. As that moving average started to trend downwards ROKU would enter a Stage 4 Decline.

At this point the fundamentals and news surrounding ROKU was mostly favorable but remember price is ultimately the deciding factor. When a stock enters a Stage 4, no one knows how far it may fall.

In ROKU’s case it fell 80% from its all time high, undercutting all the incredible progress made in 2020 and then some. 70% of the loss in share value occurred after the stock failed to retake the 200 SMA.

We saw this same occurrence happen to “high quality” companies such as PYPL, SQ, NFLX, FB and “disruptors” such as UPST, Z, SE.

No matter what your views on a company remember that “markets are never wrong, only opinions are” - Jesse Livermore.

The market always has the final word and when institutions begin selling and stocks you own begin Stage 4 downtrends, protect your capital and profits.

Here on the MarketSmith weekly chart you can see how the fundamentals are finally showing the slowing growth that the chart was reflecting months ago.

You can also see the start of a decline in fund ownership.

Remember, you can always re-enter after the downtrend is over and a fresh Stage 2 Uptrend begins after a basing period.

The big money is made in Stage 2 Uptrends and the big money is lost in Stage 4 Declines.

I hope this article was helpful! Let me know your thoughts down below and please share this with your friends and on Twitter

Best,

Richard