Shares of online movie streaming company Netflix, Inc. (NASDAQ:NFLX) fell about 12% last week on the back of a disappointing earnings report. While I believe in the company’s business model and remain optimistic about the stock through the longer-term lens, in the near-term, NFLX stock looks capped and may see lower prices before resuming its uptrend.
Traders and active investors should look to play NFLX stock to the downside toward a clearly marked target area, which we’ll discuss below.
After the close of trading on Oct. 14, Netflix reported third-quarter earnings of 7 cents per share — a penny below estimates, and down from 14 cents in the same period a year ago. Revenues rose nicely to $1.74 billion, though that figure came short of Street estimates, too.
As I have discussed in the past, however, the story behind Netflix stock is more about user growth than it is about profitability at this stage, which is how these rapid-growth companies are being measured. International expansion continues to grow nicely as Netflix will expand to countries like Italy and Spain, the costs of which will eat into earnings in the current quarter. None of this should be surprising.
As long as Netflix continues to grow at a decent clip, NFLX stock should see further upside, at least in the next six months to a year.
NFLX Stock Charts
On the two-year weekly chart below, we see that NFLX stock broke out past well-defined horizontal resistance in April of this year, and that after topping out in August, Netflix shares have been nicely consolidating this rally. Last week’s drop in NFLX, however, left behind on the weekly chart a big outside week/engulfing candle that, barring any quick bullish reversal, now favors further downside for the near-term.
On the daily chart, we see that after topping out in late Jul, Netflix the stock rallied back about 61.8% of the August drop, which of course is an important Fibonacci retracement measurement. Last Thursday/Friday, NFLX stock dropped back below its 21-day moving average (yellow) and the support line from late-August.
Thus, the weight on Netflix is pretty significant, and argues for a near-term revisit of the August lows as a next downside target.
Active investors looking to play NFLX stock to the downside could initiate small to moderate size short positions around the $100-$105 area, with an initial price target at $90 and a possible second downside target closer to the $80 mark.
Any material bullish reversal that pushed the stock back above the 21-day moving average should be respected.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.
