Shares of Netflix, Inc. (NASDAQ:NFLX) fell about 6% last week, giving back much of the late-May rally that got bulls very excited. While I remain optimistic for the future of Netflix and would be a buyer of NFLX stock at lower prices, in the nearer-term, shares still look heavy. Active investors and traders may find opportunities on the short side here.
When I last discussed the state of NFLX stock on April 20, he company had just reported its latest quarterly report and shares were tumbling. At the time, I said the stock remained in a big consolidation period — and from that perspective, nothing has changed.
Keep in mind that Netflix, while a good fundamental growth story, has been a momentum stock darling for years; from the beginning of 2015 through mid-December, the stock rallied some 190%. So NFLX is merely consolidating a monster rally, which is constructive.
NFLX Stock Charts
For perspective, we’ll first look at the multiyear chart. We see that after an already steep incline from 2012 into 2014, and following a little pause, NFLX stock took its slope from steep to vertical in 2015. I often discuss this dynamic because (particularly in cult stocks like Netflix) such vertical leaps often lead to sharp corrections.
More specifically, the typical blow-off period (a vertical rally) looks exactly like how Netflix stock behaved last year. NFLX pulled off such a rally, then peaked in August, followed by a violent but quick correction that was followed by one more rally attempt.
Indeed, NFLX stock then gave one more push into the first half of December before buyers were completely exhausted and could no longer support any higher highs. The stock then proceeded to correct 40% into the February lows before it bounced.
But note on the chart that any bounces in Netflix, Inc., have simply produced lower highs versus the December 2015 highs, and that the medium-term trend still is one of consolidation and capped upside.
Moving over to the daily chart, we see that after a hope-filled rally in the second half of May, NFLX stock exhausted itself again in the latter part of the month. This time the stock reversed back lower at a technical confluence resistance zone made up of the 2015 diagonal resistance line and the red 200-day simple moving average.
Last week’s selling pressure further scared the bulls, and yesterday (June 13), Netflix stock failed to rally again. NFLX did push higher during intraday trading but found resistance at its yellow 50-day SMA and finished the session nearly unchanged.
Active investors and traders should still look to play the stock to the short side using cheap puts or put spreads with a next downside target in the mid-$80s, followed by possibly the low $80s.
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