Red-hot Netflix, Inc. (NASDAQ:NFLX) has cooled off this month. Since peaking at $191.50, NFLX stock has lost 13% amid a virtually uninterrupted slide.
I suppose the weakness shouldn’t be too surprising given the sudden loss of appetite for momentum stocks. But all is not lost for Netflix shares. It’s down, but not out. And chart watchers everywhere are perking up for a critical test.
I highlighted the support probe of Amazon.com, Inc. (NASDAQ:AMZN) yesterday, and the action in NFLX is similar — only instead of approaching a time-tested horizontal support level, it’s officially filling the earnings gap created by the mid-July overnight pop.
That makes the current posture of NFLX stock interesting. Tradeworthy, in fact.
Netflix’s Charts
The first stop on our Netflix tour is the weekly chart. This larger time frame boasts a pattern worth bragging about — one that seems ripped straight from the textbook.
Last month’s earnings jump delivered a high-volume breakout that carried the stock to record heights. Since then we’ve seen a garden-variety five-bar pullback to support. And although the current weekly candle is still in flux, right now, NFLX stock is flashing a doji candle. Should it stick, we’d have a classic reversal candle at potential support following a multi-bar downswing.
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Like I said. Textbook.
The potential support level comes in the form of old resistance (the prior pivot high from June), the rising 20-week moving average and a gap fill that will be on display in the daily chart, which we’ll cover in a minute. The volume accompanying the past month’s retreat in Netflix stock was only average, so it’s not as if any warning signs have cropped up by way of distribution days.
Now, it’s a waiting game. We simply need confirmation that buyers have indeed stepped up and the next advance has begun.
For more detail, let’s turn to the daily chart.
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Take note of July’s earnings moonshot and the subsequent gap created. With Monday’s intraday selloff to $164.23, we’ve come within 75 cents of filling the gap. And remember, technical analysis 101 states that gaps, once filled, tend to act as support.
Of course, there’s also the 50-day moving average coming into play here as well. Suffice it to say, this is an area of interest for numerous reasons. A breakdown here would make Netflix’s stock chart unnecessarily messy and cast a shadow over the shares in the near-term. Which is why it’s game time for bulls if they want to salvage this precious chart.
Netflix, Zoomed In
There’s no reason to take a pre-emptive entry here. Make the bulls tip their hand first, then jump in if you’re inclined to buy NFLX stock. To better identify an entry point (and simply because I’m enjoying this chart-centered approach), let’s drill down even further to the 30-minute time frame.
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Ever since gapping down on news that Walt Disney Co (NYSE:DIS) was pulling its content off the service, Netflix shares have been entrenched in a downtrend. As long as this descent persists, I see zero reasons for initiating exposure. Instead, wait for a sign that the trend is reversing by seeing a rally above $169 or $170 in the stock.
At least then the evidence will suggest buyers have finally wrested back control of this smaller timeframe.
Streaming Profits in NFLX Stock
With a setup as beautiful as this, I’d typically be tempted to swing for the fence with a long call play. However, seasonality and the overall weak nature of the market have me curbing my enthusiasm.
Let’s settle with a short put spread instead.
If NFLX breaks above $169, then sell the Sep $160/$155 bull put spread. The reward will be limited to the initial premium received. To minimize the damage, exit the trade if the stock falls to $160.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
