Late October through early November is a time of some seriously supportive seasonal tailwinds for the equity market, and I’ve been working through some absolute monster ideas like AFRM, ETSY, ROKU, and CHWY during this period.

For my most recent pick, I’ve been laser-focused on the “Metaverse” theme.

What is the Metaverse, you ask? 

Simply put, this is a virtual reality space where humans can participate in a computer-generated environment, as well as with other users.

But even when I see an area of the market that is poised to take off, the price action just prior to lift-off is not always easy to manage.

That was the case this past week with shares of Roblox Corporation (RBLX), and there are some lessons to be learned from this.

Let’s take a look…

According to Finviz, Roblox Corporation develops and operates an online entertainment platform. It offers Roblox Client, an application that allows users to explore 3D digital worlds; and Roblox Studio, a toolset that allows developers and creators to build, publish, and operate 3D experiences and other content. 

The company also provides Roblox Cloud, a solution that provides services and infrastructure to power the human co-experience platform. It serves customers in the United States, Canada, Europe, the Asia-Pacific, and internationally. Roblox Corporation was incorporated in 2004 and is based in San Mateo, California.

After a strong finish to the month of October, I came into this past week looking for shares of RBLX to pull back and give me a better buying opportunity because, as I try to teach my readers each and every day, it’s best to be patient and let the trade come to you.

Waiting for a stock’s price to come to an area where you feel there should either be good support for a bullish trade or good resistance for a bearish trade helps a trader establish a favorable risk/reward setup for the trade.

You’ll come to learn that the difference between real-time trading and hindsight trading is quite significant.

For instance, in Figure 1 you’ll find an intra-day (hourly) chart of RBLX as of the 10/29 close.

Figure 1

You’ll notice at the time RBLX was setting up with a “bullish flag” (converging blue lines) as the 13-hour moving average was crossing above the 30-hour moving average (green circle).

This is a moving average crossover system that is one of my bread-and-butter buy signals, as it has helped me with countless trades throughout my career.

But not all signals work 100% of the time.

On the plus side, though, there are indicators that can help to determine the odds that a signal is going to work or not.

In this instance, Figure 1 also shows that the bottom momentum indicator (the default 14-hour RSI indicator) was not confirming (i.e., divergence) the rally at the time of this 13-30 moving average crossover signal.

Look, in the heat of the moment, when chart setups look as good as this one did for RBLX to start this past week, it’s very easy for novice traders to let their emotions get the best of them, and that can often lead to chasing stocks at the wrong time.

While this divergence did not guarantee the “bullish flag” would not work, it did signal that the rally did not have the support of momentum, increasing the potential that the rally could either stall or undergo a complete reversal.

When you develop the ability to remain calm and respect signals like this, that is when you take a giant step toward becoming a successful trader.

As Figure 2 shows, following the failed “flag” breakout shown in Figure 2, RBLX proceeded to tumble below a series of support levels, including the 3rd longest moving average that I follow, the 100-hour moving average.

In the end, though, the final moving average in this system, the 200-hour moving average, seems to be attracting buyers again.

Figure 2

Keep in mind, RBLX has earnings in about a week so I don’t plan to hold onto a full position heading into the announcement.  

Until next time…