I Couldn’t Bring Myself To Buy Roku Or Nvidia At Their Highs Today, This Is Why

There are times to “buy the rips.” This isn’t one of them.

If you are interested in trading and even in investing you most likely heard “buy the rips,” and other times you’ve heard “buy the dips, and sell the rips. It can get confusing because both are useful pieces of advice depending on where we are in the stock market cycle. You “buy the rips,” meaning you buy the breakouts into new highs when the market is getting out of correction mode, or even when the overall stock market is falling hard and you see a stalwart stock standing strong and going up hard in spite of it. So if you are in an emerging rally, even short term, like that Monday following the 600 points sell-off on Friday, you could have bought a high beta name that day ripping higher and done very well. I tried to get you to buy in at the close on that Friday, which was a different strategy and not the topic for today. We are in a different mode right now, we are well into a corrective phase. What I mean by that is – forgive the repetition – the stock market can correct by dropping hard, like that Friday, and also by meandering around a certain level marking out a plateau – correcting over time. That doesn’t mean the S&P 500 can’t make short forays into new highs, which is what we are getting. The overall movement should be sideways for the next few weeks. That means the rips in my view should not be bought, and in fact, will be sold. The “Prima Fasci” case is Roku (NASDAQ:ROKU), which I will deal with separately below. I want to explain my hesitancy regarding going long in Nvidia (NASDAQ:NVDA) in a compare and contrast with Shopify (SHOP).

Yes, last night I said that of all the stocks reporting Nvidia is the one I’d buy

Yet, looking at NVDA this morning up almost 20 points, I just can’t bring myself to pull the trigger. Also Roku (ROKU) up 9 points (I started writing this morning), though as I illustrated in the chart yesterday is much scarier to me, so I’m not tempted there too much. Arista Networks (ANET) is selling off as I expected and Alteryx (AYX) is up moderately (it ended much higher). I’m just very cautious this morning. I was certain that the selling would continue last night and this morning the market did not cooperate, until late afternoon. NVDA, as I said last night, gave a perfect report. What gave me pause, was being mindful of where we are at in market sentiment, as I said, but also fresh in my mind is what happened to Shopify (SHOP). What do I mean? It too had a fantastic report, and the stock shot right up, hitting 594. You could make a very good case for all the stocks in this article, not only for the highs they turned in today, but even higher, at some point. Just not now. Anyway, let us take a look at the SHOP chart here.

Let me start by saying I have been a supporter of SHOP from before it had a triple-digit stock price. Frankly, I couldn’t imagine it would get this high, not because the stock is way overpriced, just my lack of imagination. So I stopped talking about it. In any case, we see SHOP blasted up like an ICBM, all the way to 594. We call that a gap up. It opened way higher than the previous close. Generally in charting, you expect at least some of a gap to be filled, if not all, before a stock makes new highs. This happens a lot. The above is a five-day chart and so far what we are seeing is a downward pennant that’s not yet ready to be resolved. Meaning, that in my opinion SHOP still has a way to go to the downside before it starts regaining ground. Another rule of thumb is the 50% retracement, where a stock that made very strong gains usually gives up about 50% of those gains before it starts climbing back. So just eyeballing this chart, the lift looks like 490ish to 590. Hey that means that it’s trading close to where it might make a base to bounce back. Let’s keep that in mind! Here is what NVDA looks like now, here.

This is a five-day chart as well. The peak for NVDA today was just below 295, and closed just above 289. I fear that NVDA will behave like SHOP and also fall hard, perhaps it will have a have a 50% retracement from the close, or perhaps more. I don’t know. What I do know is that I don’t want to take a chance on this name going into the weekend. So I want to pass, I want to wait for a stock and buy the dip once it bases.

ROKU acted just the way I expected it to

First, let me say once again that I have been a bull almost from the moment ROKU had its IPO.

I have no quarrel with the bull case at all. It’s just that at 151, where it peaked last night, that it’s fully valued. In fact, the entire range it has been trading in could be a justified level for ROKU. When you are trading at 17 times revenue, even growing at a torrid 40% you can grow into that valuation for quite a while.

Here are some quotes from the CEO of ROKU from an interview on CNBC: “We provide tools, to allow content providers the capability to build and monetize their audience and when they succeed we succeed.”… “We had a great collaboration with Disney for Disney+, Apple TV too. They are leaning into our tools and we were an important part to add subscribers.”… “We are managing churn and the life cycle of our partners like Disney.”… Our business model is not about a bundle, streaming is a new business and we helping our partners because we aggregate audiences.”

CNBC Question: “Can you expand on how you help content providers with churn?”

“ROKU can help reduce churn for content providers. We can help viewers get back on a channel by promoting shows to get them to come back for a new show. We know our viewers so we can target them specifically, promoting shows and targeting them via machine learning and data science. Our ARPU has been growing every quarter because we are running the business well.”

Importantly, Anthony Wood, Roku CEO, finished by stating:

“We added 10 million active accounts last year, and for 2020 we are reinvesting into our business. We are going to run the business on a break even cash flow basis for now.”

That means ROKU is less concerned regarding showing profits. I have no problem with that as long as they show free cash flow and they are growing their revenue, subscribers, and don’t need to sell shares or take on more debt because they don’t have the discipline to live within their means. That said ROKU is an exciting, interesting company and at the right price ROKU is a very good stock for alpha

What happened with ROKU today

ROKU had what is known as a key reversal. It opened at its high and closed near its lows. Not to boast but I totally called this yesterday. Here’s the chart from yesterday here.

The green line was the mark for where ROKU was trading last night, around 150. Here’s the three-month chart from today here.

You can very clearly see the reversal, where stock market participants rejected the stock at the highs. I used two lines to mark out support. The stock has at least 6 to 10 more points of downside. That said, it may finally break this support as well. Don’t be a hero. Wait for the stock to base before you take a long position. As far as NVDA is concerned perhaps I’m wrong, perhaps it powers way higher. There are other stocks. If you try to have a discipline in trading it means that sometimes you let a big one get away. So I would wait and give NVDA a chance retrace a bit. Instead, why not track SHOP? That name might be about to turn back to a significant uptrend

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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