I remember times when Netflix (NASDAQ:NFLX) hogged the headlines for weeks on end. These days, Wall Street is more preoccupied with cannabis stocks, or initial public offerings (IPOs) like Uber (NYSE:UBER) and, more recently, Beyond Meat (NASDAQ:BYND). While it’s no longer in the limelight, NFLX stock is silently making moves in the background.
It has been consolidating for a long while. But the opportunity today is with the levels where this action is taking place.
Netflix stock is trading inside a range to establish a base camp that could catapult shares of NFLX $100 higher. Yes, it could still make a move to the high $400 per share. This opportunity is technical, so I would label it as tactical with medium conviction. It is independent of the company’s current value and its odds of long-term success.
Since March 2018, Netflix stock has used $335 per share area as a major pivot. A year ago, the bulls broke NFLX out of that pivot. But then the fall correction reversed that move and sent NFLX shates the other way into its December lows.
Then NFLX bounced off the lows very sharply and has spent all of 2019 consolidating around the same $335 per share zone. This is not a hard line in the sand but rather a band where bulls and bears are fighting it out fiercely. The end result of this stalemate will be a big move but where the direction is still unknown.
If the equities in general rally, I bet Netflix will break out from these clutches. The exciting part comes from the fact that this would be a bullish inverse head-and-shoulder pattern that would result in a $100 move. This would be the opposite pattern to the one that crashed the stock last October from almost the same zone.
This year, the bulls are in control of the stock market. Yes, we’ve had our bearish stints but the bulls bought the dips. While sentiment is not perfect, especially since we have an ongoing trade dispute between the U.S. and China, the U.S. Fed is now on the side of equities.
This recent swoon is a perfect example. When the S&P 500 fell on Trump’s Mexicican tariff tweet, traders followed up that reaction with the best week of the year. The bears are unable to sustain the selling and that’s why the stock market is are near all-time highs.
This helps Netflix stock in deciding which way the move will go from this tight situation. If the near- to long-term price action trends higher, then NFLX stock is likely to break out. Once Netflix shares pass the last fail level, momentum buyers would come into play.
Click to Enlarge This is still a momentum stock so when it catches a wind it accelerates in that direction. So then buying begets more buying. Those who chase it like to buy high and sell higher.
There are short-term lines to know …
Above $385 per share would be the best trigger for this move. But there will be resistances at $367 and $372. I know this sounds impossible, but as we’ve seen the rally in December, NFLX stock can move 40% in a matter of days.
Conversely, below $332 per share would invite sellers so traders should set tight stops unless they plan on turning this trade into an investment. I prefer selling puts below current support to trade moves like this where the breakout is not guaranteed especially when we have so many geopolitical headline risk completely independent of NFLX itself.
So what about its fundamentals? This is not a cheap stock. It sells at a 129 price to earnings ratio. But as long as it continues to be a growth stock investors need not judge its profitability. The bullish thesis on NFLX is that it has a massive addressable global market and that it’s only begun to scratch the surface.
The company has its critics and they are loud and proud. They offer excellent reasons to short it. NFLX spends too much on producing content. They also could have a problem with churn. Although they still have the first mover advantage, competition is nipping at their heels. Normally I wouldn’t worry about that yet but this bunch scary potential foes.
Disney (NYSE:DIS) is the closest to go head to head and it comes with major advantages. I worry that Netflix management doesn’t give DIS enough respect. Every parent on the planet will want to subscribe to Disney’s stream because every child on earth will demand it. Luckily for NFLX is that they are both cheap enough that parents may not need to choose between the two yet.
Moreover, NFLX ace in the pocket is its content but it comes at a tremendous expense. So they borrow to feed the beast and luckily that rates are not going anywhere for a long while so that’s not an imminent danger. But DIS already has content that people want and they do produce new versions much cheaper so they will be able to compete on margin if it comes to it.
While I do sound like I am making an anti Netflix argument here, I am not. I do believe that NFLX needs a few miracles to go their way in the long term, here I see a potential rally that could deliver a ton of profits. So I set my alerts to chase it.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room free here.
