Third-quarter earnings season is set to kick into high gear this week, and that includes Netflix (NFLX), which is scheduled to release its earnings report Wednesday after the bell. Given the tendency of NFLX stock to move meaningfully on the back of its reports, you should have a trading plan to execute once Netflix begins reacting to the news.
Netflix earnings for the third quarter are expected in at 93 cents per share on revenues of $1.41 billion — down year-over-year from EPS of 52 cents on revenues of $1.11 billion.
NFLX recently began a big international expansion project, centered in Europe, which arguably kept the stock afloat on hopes of good adoption numbers. With Q3 numbers about to be released, we will see what Netflix’s initial success internationally looks like, and that could lead to a good swing for the stock in either direction.
Brokers still are marginally bullish on the stock; Nomura has a price target of $425 while Cantor Fitzgerald has a $500 price target.
NFLX Stock Charts
On the longer-term weekly chart, the picture looks increasingly more concerning. After NFLX stock in September 2013 broke past its previous all-time highs from July 2011, it successfully and constructively retested the breakout level in May of this year. In other words, previous resistance became support.
However, the entire move has come on waning upside momentum, and considering what’s riding on third-quarter Netflix earnings, a make-or-break situation could arise. From this perspective, a weak reaction to the company’s earnings could well bring NFLX stock back down toward the $300 area (i.e., the breakout area from September 2013).
To gain a little better perspective on this, let’s look at the daily chart and note that here too the upside momentum — as per the Relative Strength Index on the lower part of the chart — has been making a series of lower highs all year, while NFLX stock made higher highs. All of this points to a higher likelihood of the stock sliding lower in coming weeks. It is furthermore likely that NFLX stock will either gap up or down after the earnings report, which would quickly accelerate the stock’s momentum in one direction or another.
Many momentum funds and fast money traders are still involved in this stock, which stands to exacerbate the post-earnings move.
The bears will want to see if NFLX stock can break below $437 and then below $420, which was the early August low and now also roughly coincides with the rising 200-day moving average. A break below those levels on good momentum could get the stock moving back toward $300 in coming weeks/months.
The bulls, on the other hand, want to see if NFLX stock can regain some upside momentum by breaking past $475 and holding. Such a reaction could get the stock moving toward $525 over a multiweek time period.
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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.
