If there was ever a day for stocks of all stripes to gallop higher, it was during yesterday’s melt-up. The S&P 500 scored a 2.51% gain by day’s end. And yet, Netflix (NFLX) stock — a momentum darling if there ever was one — suffered a whopping 7% intraday bearish reversal.
Perhaps it would be forgivable if yesterday’s swan dive was a one-off event, but unfortunately for Netflix stock fans, that’s not the case. The technical deterioration for NFLX stock is really starting to add up here.
The most prominent chart pattern exerting its influence on NFLX these days is likely the head-and-shoulders formation that has developed over the past two months. As the name suggests, the bearish pattern arrives at the end of an uptrend signaling a top in the stock price.
Breaking the neckline of the pattern is supposed to both complete and confirm the formation. And NFLX stock did that in spades with yesterday’s free fall.
Now, before the bears get all giddy over the recent culmination of such an ominous looking topping pattern, it’s worth noting that NFLX has already tumbled a fair distance. Since its prior peak (the right shoulder) on Aug. 28, Netflix stock has fallen some 18% already.
If you think lower prices are in the offing, you might consider waiting for a rally in the stock price to higher levels before jumping in.
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A rally that could be starting today. Netflix bulls haven’t lost all hope, actually sending shares higher some 5% on Wednesday. So there is always the chance that the head-and-shoulders pattern fails and NFLX stock returns to its bullish ways.
You’d want to watch for a decisive break back above the neckline near $102 to invalidate the recent breakdown.
Either way, we’ve got a way to play.
Two Netflix Stock Trades
Bears: If you think the pain train keeps chugging along, consider buying the Nov $100/$90 bear put spread for $4.50. The strategy consists of buying to open the Nov $100 put while selling to open the $90 put. The trade will get even cheaper if Netflix stock price rallies further from here. The max risk is limited to the initial $4.50 debit and will be forfeited if Netflix stock price sits atop $100 at expiration. The max reward is limited to the distance between strikes minus the net debit, or $5.50, and will be captured if NFLX drops below $90 by expiration.
Bulls: If you think the topping pattern ultimately fails and the oversold conditions in NFLX stock represent a buying opportunity, consider selling the Oct $85/$80 bull put spread for $1.25. Think of it as a bet that NFLX remains above $85 for the next month. The max reward is limited to the initial $1.25 credit and will be captured if the puts end up expiring out-of-the-money. The max risk is limited to the distance between strikes minus the net credit, or $3.75, and will be lost if Netflix stock price descends beneath $80.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
