Another big day for Roku (ROKU). Here’s how that trade worked out. (September 29, 2017)SP-500 TNX--X SP DXYO SPV T2100 T2108 SP-500 DJ-30 MDY IWM DJ-20 FDX UPS XLF DJUSBK XLK SMH ITB
I want to look at Roku (NASDAQ:ROKU ) again today. I covered this stock on Thursday night after the IPO, after the stock started trading. The idea was we were just basically looking at how you can get into this stock and stay long by defining your risk and essentially accepting the fact that on the opening day of trading you really just don’t know where it is going to go. There is not much technical evidence at all, as far as where supply and demand is, so you just kind of have to put your money in there while the stock is trending up and hope that it continues.
But, after a while, you see what is happening during the day. So we are looking here on Thursday and I had noted, after the close, that the stock would probably gap up the next day, meaning Friday; just because there was evidence of buying right into the close and the stock was actually up a little bit after hours on Thursday. That is not, frankly, the typical case for an IPO. The first day a stock starts trading it doesn’t typically double and close right at the top of the range.
The way Roku (NASDAQ:ROKU ) was trading you actually kind of got the impression that if it hadn’t been for the closing bell the stock would have just kept going. And so, of course, what happened Thursday, it hits the financial news. People get ready to roll on Friday. And then what happens? Boom! You can see here, we get a gap up. The stock gaps up quite a bit, and now what do you do at that point? You start looking, frankly, to take profits. Coming out of a squeeze here on Thursday, it is a 5-minute chart right towards the end of the day and the stock starts moving up. It doesn’t come close to testing the open and now we are getting close, and now we are down below.
So if you are trading this type of a gap, and I know the stock ultimately goes up a little bit from here but we can always trade something perfectly in hindsight. The point here is, you expect the gap, you see the gap. You look for the stock to continue after the gap and it does. So once the stock then starts selling off, and you can manage your position here and there on a 5-minute chart. But what we are really looking for is a sense that the stock has kind of petered out. That we are looking at this kind of move up, and then ultimately a sell-off.
The way we do that is, you look and see where the stock opened, maybe even where it traded during this first 5-minutes, essentially the low of the morning rotation, and then now you are out, right there. So what happens for the rest of the day? There it is. You could have got out right at the top, a few people do, some did. But for the rest of us mere mortals, what you are doing is, you are waiting to see whether the stock is going to come back down and start filling the gap. If it does you are going to exit.
But who is quibbling right now? This has been a good run, a great trade. Ride the gap. Hold it and then finally exit the stock for a nice profit. This is one of those things where the traders who bought the stock as soon as it opened for trading, they are looking pretty smart because even if are still holding it you are buying at 16.00, 17.00, even $18.00. Now the stock is trading at 25.00. It traded up almost to 30.00. That is a good do for an IPO stock.
On these types of things it is just important to look at the dynamics of the first day of trading. All this stock is coming onto the market, a lot of stock changing hands. You can’t have a conviction about the stock. I don’t care what it is, Roku (NASDAQ:ROKU ), Yoku, Yoko, Ono, whatever it is. It doesn’t matter. You have to look at the way the price is moving. Look what happened to some of these other IPOs that we have seen, where the stock just goes down, and down, and down. And you are sitting there holding the stock for what reason? Because you are a believer? If you want to be a believer that is what you do on Sunday. When it comes to trading you just ride the trend as long as the trend is there.
Try to imagine what big institutions are doing. The way you can do that is to just use your, seriously, common sense. Here is a rule: A stock is not going to be moving up if it is seeing institutional selling. It is kind of impossible for it to be doing that. So if it is moving up the institutions aren’t selling. When it stops moving up, maybe the institutions aren’t selling or at the very least, you know they aren’t buying.
The last point is this: With respect to what the stock is doing right now, on a daily basis, this is a tombstone doji, kind of sort of. A tombstone doji is a candle where the stock opens and closes right about at the same level, which is kind of what it did here. And then it trades up quite a bit and then it trades down quite a bit. So it effectively closes where it opened and that is at the bottom of the range. This isn’t quite that, but you do get the sense that this is kind of a climax buy right here. I would look for Roku (NASDAQ:ROKU ) to trade lower over time. That was an interesting trade, not really interested in buying the stock from here on out for quite a while. I just don’t think it is the best use for my money in time. But if you see an IPO like this, then it is the best use of your time.