Trade of the Day: Netflix Stock Is About to Take a Tumble

NFLX stock can't fight gravity much longer

Netflix (NASDAQ:NFLX) … just the mention of this name gets traders and investors excited, and for good reason. NFLX stock has been a beast of a performer for the bulls for many years. While I am not bearish on the stock through the longer term lens, in the near term, the stock looks to have lots of overhead resistance and I see the path of least resistance resolving to the downside.

Trade of the Day: Netflix Stock Is About to Take a Tumble
Source: Shutterstock

Over the course of my 20-year career as a trader and investor, a key mistake on the part of market participants that I have witnessed time and time again is the failure to separate a company’s fundamental story from the broader structural market environment. The point of valuations continually comes up by investors, and even traders, as a reason to “buy the dip” in a stock.

While the fundamentals of a company do eventually matter, the time frame within which they will matter is often largely off from the time-frame that a trader is looking to be in the trade.

NFLX Stock Charts

Click to Enlarge
Source: Charts by TradingView

And this brings us to the charts of Netflix stock. The multi-year weekly chart clearly shows the stock’s sharp upward trajectory over time. While the up-trending range is wide, we can see that the sharp rally in the first half of 2018 was a clear overshooting move that ultimately led to a nasty mean-reversion lower.

The bounce off the late December 2018 lows was also sharp but note that the stock for the past few months now has been struggling at the upper end of the big picture range, marked by the black parallels.

Considering the broader market’s increasingly risk-off feel, a big “risk-on” stock like NFLX stock is fighting an uphill battle to keep the rally going.

Click to Enlarge
Source: Charts by TradingView

On the daily chart, we see that in mid-May NFLX stock attempted to break out of a multi-month trading range, but its attempt quickly faltered.

On May 22, NFLX stock flashed its first qualified B2 bearish reversal signal as the stock failed on an intraday rally attempt. The same thing happened again on May 28. All of this tells us that there is a lack of buyers in the $360 – $370 area and that it would likely take a substantially positive headline to get the stock above said area of resistance.

In the meantime, NFLX stock looks poised to slide lower and the stock could be sold short or at the money puts or put spreads bought with the stock around the $350 – $360 area. A clear stop loss level is at $370 and a next downside target around $335.

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