Netflix, Inc. (NASDAQ:NFLX) stock fell about 40% from its all-time highs last December through early February’s lows — a nearly half-off sale in the span of two months. As a result of this sharp drop, Netflix stock broke many intermediate-term technical support lines, and clearly is in correction mode.
That’s good news for traders and more active investors, who now have a defined area of resistance to play NFLX higher — right before the short side becomes more attractive again.
How many investors on the street are aware of the severity of the decline in Netflix stock? Not many — at least according to my contra-stream mood measurement Twitter feed. Oddly, if you’re looking at this gauge of investor sentiment, traders and investors alike appear nearly as upbeat about NFLX as they were last December
And that’s where the opportunity lies.
When Netflix reported its latest batch of earnings in mid-January, the stock bounced for two days before sellers re-emerged and broke the stock below the 200-day moving average for the first time since 2014. This in turn accelerated the downside press, which didn’t get near-term exhausted until early February.
The so called “FANG” stocks — which include Netflix, Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), the G when it was Google — outperformed so nicely last year, but ultimately could no longer fight gravity and have come crashing lower in a meaningful way.
To be clear, I remain bullish on many FANG stocks, including Netflix. But the reality is that true cyclical bear markets — like the one I believe we currently are in — leave no space in the equity world for investors to hide. Netflix and a few other cohorts were mercilessly chased higher in the second half of 2015 by underperforming fund managers while the broader market was already just inches away from crashing into a bear market. The January/February selloff in the broader market then dragged with it the few gravity-defying stocks such as NFLX.
Netflix Stock Charts
On the multiyear weekly chart, we see that the year-to-date selling in Netflix stock has led to a break below the 2015 support line, and thus out of what was a big rising wedge pattern.
I don’t think this corrective phase for NFLX is over just yet, as bottoms in such corrective phases see divergences between price and momentum. Currently most momentum oscillators — such as the Relative Strength Index depicted at the bottom of the chart — are still pushing lower along with price. A better downside target through a multimonth lens for Netflix is in the high $60s to low $70s, as represented by the red dotted horizontal.
On the daily chart, we see that Netflix stock exhausted its near-term downside in early February and has been working higher since along with the oversold bounce in the broader stock market. Thursday’s rally now has NFLX pushing up against multiweek diagonal resistance, and a break past this area could get the stock to push toward a confluence resistance zone around the $103-$105 area. This zone is made up of the 50- and 200-day simple moving averages and previous diagonal support.
Active investors and traders could look to play the stock into this area on the long side with reduced size, then look to re-short or sell the stock upon a confirmed bearish reversal in the $103-$105 area.
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