by Serge Berger | April 9, 2014 8:08 am
Although Tuesday’s oversold bounce in stocks was a low-quality one (in a broader sense), many beaten-down tech stocks bounced off crucial medium-term support areas. Netflix (NFLX) stock was right in the middle of this bounce, springing from its 200-day moving average after having touched it Monday for the first time since late 2012.
As usual with crowd favorites like NFLX stock, the past two days also were rife with news, which likely further helped to boost the Tuesday bounce.
Brokerage house Stifel issued a positive note on several momentum names — including Netflix stock — saying that NFLX and others could rally as earnings reports loom in coming weeks. (Note: Netflix is scheduled to announce earnings on April 21 after the bell.)
On Monday, Oppenheimer also had positive comments about the momentum stocks, including NFLX, saying the selloff has created a buying opportunity.
The charts — at least in the intermediate term — are echoing some of this analyst positivity.
To gain a little perspective, let’s start out with the multiyear chart of NFLX stock, stretching back to 2011. The red line is the 200-day simple moving average, which, prior to Monday, Netflix stock hadn’t visited since December 2012.
Note that when NFLX stock rallied strongly into its July 2011 highs, it ultimately wound up breaking below its 200-day moving average in August, which accelerated the downward press. Through the medium-term lens, only time will will tell whether NFLX will break below the moving average this time around and mean-revert in a more meaningful fashion again.
The upcoming Netflix earnings report could well be the trigger for that.
Given the steep rally to start 2014 — which came on top of a great 2013 — NFLX stock was overdue for a mean-reversion move lower. In percentage terms, Netflix shares dropped close to 28% over the past month or so, and by having revisited the 200-day MA, they also filled their up-gap from the January earnings announcement. All of this could lead NFLX to bounce a little in the days heading into Netflix’s report.
More importantly however, the current setup in NFLX stock offers very defined risk for the active investor.
Namely, Monday’s low around $331 — just a touch below the 200-day MA — is the level that traders could lean against on the long side, using it as an absolute last resort of support. (A break below $331 could get NFLX to accelerate to the downside once more.)
Looking up, depending on the velocity of any continuation of Tuesday’s b0unce, NFLX stock might be able to rally all the way back to its 100-day MA (blue line), currently near $385. However, taking upside targets in $10 increments might be better risk management.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
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