The selling reached a fever pitch on Friday, finally taking down leading stocks. Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOGL, GOOG) all suffered haircuts averaging around 3%.
While pessimists may cite the takedown as a sign that the ongoing pullback has taken an ominous turn, sometimes the liquidation in leading stocks actually signals the market selloff is in its final throes.
If you’re a fan of the latter narrative, then last week’s dip may be providing an opportunity to grab one of the four horsemen on the cheap.
Support looms large for NFLX stock at these levels so let’s focus on it for today.
NFLX Stock Still Looks Solid
On the price front, NFLX remains on solid footing. Despite a failed breakout attempt over the $130 level and mild break of its 20-day moving average on Friday, everything else weighs heavily in favor of the bulls.
The rising 50-day and 200-day moving averages increase the likelihood that the current retracement gets bought before doing too much damage.
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We can use the principle of polarity — old resistance becomes new support — to identify where buyers are likely to materialize this week. As illustrated in the chart at the right, the $116 level acted as resistance multiple times over the past few months. Its failure led to the price advance up to a new high of $133.27 for NFLX stock before last week’s selloff.
With the stock now returning to the scene of the breakout, the bulls have a golden opportunity to defend their turf and keep the breakout alive. Should the breakout re-test fail, the 50-day moving average is rising swiftly and should meet the stock just below $116, so that would be the next area to watch for support to form.
If you’re willing to side with NFLX stock bulls in the weeks ahead but want to hedge your bet by structuring a higher-probability trade, consider selling January bull put spreads.
Sell the Jan $108.57/$104.29 put spread for $1 or better. The reward is limited to the initial $1 credit and will be captured provided Netflix stock price sits above $108.57 at expiration. The max risk is limited to the distance between strikes minus the net credit, or $3.28, and will be lost if the Netflix stock price drops below $104.29 by expiration.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
