The 3 Day Rule…applied to Roku (ROKU). (November 14, 2017)


Let’s look at Roku ( NASDAQ:ROKU ). For the last few days I have been talking about this, pointing this out. I am not the only one, it is a high profile stock these days, a lot of momentum. Traders have been on this thing, I have been one of them but Elvis has left the building here. A lot of folks, happily I am one of them, a lot of folks made a lot of money on this. I actually traded this fairly skittishly I guess. I had some shares after this first day and then the stock gaps up, keeps going, I make a nice profit. But my deal is, at that point, just because I respect my profits, I respect my money I closed out of that position. Then the next day when it gaps up I am in and I ride that up for a really nice profit.

Today, I actually said, “You know what? It used to be the 3-Day Rule. Smart money buys on the first day. The semi-smart money buys on the second day. The not so smart money buys on the third day and the stock crashes.” So the stock opens up this morning and I am thinking, “Maybe it is the 4-Day Rule.” So I got in a little bit of stock here and then what ultimately happened, it didn’t take too long at all, you can see this; a stock rallies up a bit, trades down and basically doesn’t really continue. And that is different than what it has done in the past. So I closed this out for a small loss today, but my overall profit on this was actually quite good.

What I am trying to show you is (not talking about my trades because I lose money too, only the liars don’t), this is a trade that was actually very, very clear. Again, it is tough for me to just hang on to a stock that gaps up 6 percent and then the next day gaps up another 5.25 percent. Those are just big gaps and the problem is that the stock can be so volatile. In four trading days this thing went up 150 percent, so that is a wild bronco that you are riding.

What I want to talk about is how you get out of it at the right time. You want to be riding this as long as you can until it bucks you off. So you can look at a couple different things. Today these are pivot points that were based on yesterday’s trading. The stock opens up actually almost to the first resistance level right here. And then ultimately, the first resistance level is 48.51, the stock trades up to 48.80, so almost 29 cents above where the stock opened and it printed that pretty quickly as you saw in the intraday chart. The stock gaps up there, hits a key resistance level and then drops down. That is when you know that at least on the shares that you bought recently you should be selling those shares or you should say, “Well, I am glad I waited because I see this is a key resistance level.”

These are things that fast traders use all the time, these pivot points. The stock gaps up, runs up to this first resistance level and then starts rolling over. Well, stop and think about it for a minute. Again, in four days the stock is up 150 percent. At that point, if the stock is unable to go through a resistance level rather than just continuing to move like so many other resistance levels over the last three days, don’t you think this is a big change in the stock particularly after three days? Remember, smart money on the first. Semi-smart on the second. Not so smart money on the third. And the REALLY not so smart money on the fourth, it is kind of left holding the bag. So when it fails here that is when you are really looking to exit or maybe you are already exited but you are at least not buying the stock.

Now, if you bought the stock here and you are holding on to this stock still, you gave back 13 percent from the open and you are wondering when the stock is going higher. You are not thinking you are hoping. You don’t get to think what a stock is doing. I say this stock is completely done. It was shortable except you can’t borrow the shares and options are way too illiquid, they are way too expensive and the spreads are really, really, really wide. In my view, there is no way to short this stock, otherwise, I would have done it today at about $45.00. At this point, for me, I am just staying clear of this. Thank you for the money. I appreciate the dance and that is all; we are just done here. Wait for the stock to reset.

Now, one other thing though, if the stock starts trading to new highs well then you know what is happening, it is a short squeeze. Seriously, I would rather buy the stock at $49.00 than at $37.00 because here this could just be a little bit of an oversold bounce, a lot of people getting rambunctious and wanting to get the stock before the next move. Ultimately the stock peters out and then really slams down, you just don’t know. But after this kind of day, if it the stock moves to a new high, over 48.80, we’ll say 49.00, I don’t even care about 50.00; if it moves up to 49.00 now you know the shorts are really being squeezed and the stock is going to move up higher even still. Until you see that, hopefully, you took the money and ran and now you are just waiting for it.

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