Monday was a conspicuously weak day for shares of Netflix (NFLX) stock. But if our assessment of Netflix’s price chart is accurate, the bear run could be just getting started.
Shares of Netflix stock shed about 2.25% Monday, compared to the NASDAQ 100’s (QQQ) gainer of 0.33%. Behind the scenes, much ado over Netflix’s weak showing at the Emmys may have had some bullish investors heading for the exit.
Not that I blame bulls for their cautious action on Monday, but I don’t necessarily agree with the catalyst. For this market strategist, concern of a pending, large move to the downside in Netflix stock is about looking at and appreciating a different small screen — the one featuring our trading charts.
Netflix Stock Charts
Reviewing the daily chart of Netflix stock, shares of NFLX have been correcting since hitting all-time-highs at “A.” A fast price slide to “B” made for a 50% Fibonacci retracement from the January 2015 cycle low near $45 and a decline of 34% from its early August peak.
The combined action in Netflix stock has admittedly been severe, but we don’t think the worst is over just yet. Netflix stock should see further testing down to $75 or $80 before all is said and done.
The basis for our bearish price target zone is based on a completion of leg “CD” mirroring the dollar move of AB,” testing of NFLX’s 200-day simple moving average and Netflix stock’s 62% retracement level.
Getting bears to react forcefully, Netflix stock’s symmetrical triangle’s support line is currently being tested. If the pattern support breaks, the price action should force more than a few bulls to reconsider and bears to become more aggressive.
Typically seen as a neutral price pattern, this particular triangle in Netflix stock appears to be a bearish continuation formation.
Netflix Long Bear Put Strategy
NFLX options premiums are expensive, but justified by equally high underlying volatility. Our view is to hedge that risk and take advantage of the steep pricing by buying a bear put vertical.
Using a vertical versus an outright long put in Netflix stock will drastically reduce the cost involved, which improves the trader’s breakeven and greatly cuts down unwanted implied volatility and time decay risks.
Checking the options board on Netflix stock, one attractive spread is the October $105/$100 put spread.
Priced for a debit of $2.80 with shares of Netflix stock at $100.30, this spread is more expensive than lower strike verticals of the same width. But, its expiration breakeven of $102.20 and ability to maximize its profit of $2.20 just 30 cents lower from current levels is very appealing.
To keep potential losses in line with lower priced verticals, I’d look to protect the limited-risk position with a stock-based stop-loss above $105.25 and a technical breach of the triangle’s resistance line.
Were a stop-loss necessitated in the next couple of weeks, the loss on the Netflix stock vertical could be expected to be between 70 cents to $1.40, or 25% to 50% of the debit of $2.80. That’s not going to win us an Emmy for best performance, but more importantly it will keep traders from taking home a Razzie.
The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. Mr. Tyler currently holds no positions in any of the securities discussed in his personal or managed family accounts but may initiate, for better or worse, a position in two or more business days following the publication of this article.
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