Stock bulls received their long-awaited reprieve late last week in the form of a 5% rebound in the S&P 500, aided by an epic snap back in crude oil stocks across the board heading into the weekend.
Except for Netflix (NFLX) that is.
The once beloved momentum stock has been found wanting of late. Watching equities scream higher while your holding sours is the ultimate insult — worse than being the last kid to get picked for the kickball team, you weren’t picked at all. Such is the plight for NFLX stock owners these days.
While its weakness amid the broader market’s correction is understandable (indeed forgivable), Netflix’s inability to rise amid a buying frenzy is not.
So let’s take a renewed look at the price action of Netflix stock to see if we can sort its new undesirable status out.
Click to Enlarge
Take a gander at the accompanying NFLX chart. Like most stocks, Netflix is sporting a large topping pattern on the cusp of completion.
Its lackluster action throughout 2015, coupled with its inability to score a significant higher high, is a pebble toss away from creating a double top pattern.
The key level to watch in the days ahead is $95. This zone has been a bastion of strength, a gathering ground for bulls to finally quell the occasional selling raids. It halted the August crash along with a number of retests since. Should Netflix stock ultimately breach this level, the bears will have finally wrested complete control.
Yet another feather in the bears’ cap is last week’s descent below the 200-day moving average. With Friday’s plunge, Netflix stock submerged a fair bit below the oft-watched measurement for the first time in about a year.
Bad things happen when stocks fall beneath the 200-day moving average, so if you’re a NFLX lover you best pray for the market gods to correct this atrocity before things get really nasty.
The Netflix Stock Trade
If you think a retest of the August low in NFLX near $90 is inevitable, consider this put spread to profit.
Buy the April $100/$90 put spread for $4.10. The max loss is limited to the initial $4.10 and will be forfeited if Netflix stock price sits above $100 at expiration.
The max gain is limited to the distance between strikes minus the net debit, or $5.90, and will be captured if the NFLX stock price can fall below $90 by expiration.
Traders looking to bail at the first sign of trouble could close the trade by selling the put spread if Netflix stock rallies above near-term resistance at $110.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
