NFLX Stock Has Snapped an Important Support Line

by Serge Berger | January 8, 2014 8:31 am

Movie rental service company Netflix (NFLX[1]) was back in the news Tuesday, which led to a notable one-day selloff in NFLX stock that had some technical significance.

beat-the-bell-nflx-stock[2]This time it was a research note from Morgan Stanley that caused volatility in the stock. In the report, MS analyst Benjamin Swinburne downgraded NFLX stock to an “underweight” rating from the previous “equal weight.” The analyst also lowered his price target from $333 to $310.

The analyst’s base case for the downgrade was increased competition in U.S. digital video streaming. Competitors such as Hulu Plus, Amazon (AMZN[3]) Prime Instant Video and HBO GO already offer good alternatives to the Netflix service, and are expanding aggressively. According to Swinburne, each of those competitors to NFLX could end up cornering specific segments of the market, which would eat into the company’s growth rate as well as lead to increasing marketing costs.

High-beta stocks like NFLX — which currently sports a beta of 2.13 — have a tendency to be highly sensitive to every bit of news, as the masses of traders and investors involved in the stock quickly get anxious, nervous or overly enthusiastic.

After it was all said and done on Tuesday, NFLX stock closed lower by 5.58% and broke an important technical line of support.

As a high-beta issue, NFLX stock has, over the years, endured plenty of major trending moves, the latest of which I marked within the black parallels on the below chart.

Click to Enlarge

With Tuesday’s selloff, NFLX stock broke below this uptrending channel for the first time, which also led to a drop below the rising 50-day simple moving average (yellow line) for the first time since April 2013. Tuesday’s price action should be concerning for the bulls, at least for the medium term.

On the closer-up daily chart, NFLX stock — barring any quick bullish turnaround — now looks to have next better support at its 100-day SMA (blue line), which as of Tuesday’s close is about 3.7% lower. The first major warning signal that Netflix investors received came Nov. 22, when the stock developed a significant intraday pop ‘n’ drop after earnings that led to a nasty outside day bar. Although NFLX stock again managed to regain its composure throughout December, the rally merely retested the upper end of the trading channel.

In the last days of 2013, NFLX stock again began to show weakness, which ultimately led to the trendline break on Tuesday.

nflx daily
Click to Enlarge

Investors in NFLX stock should take this recent price action as a warning signal that more weakness likely lies ahead, while quicker traders could try the stock from the short side with price targets near $330 and $300.

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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here[5]. As of this writing, he did not hold a position in any of the aforementioned securities

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