Following recent earnings reports from Netflix (NASDAQ:NFLX) and Spotify (NYSE:SPOT) and a chance for investors to hit pause, it’s time to hit play on a pairs trade by shorting NFLX stock and going long SPOT shares. Let me explain.
All trends do come to an eventual end. And for streaming video-on-demand (SVOD) giant NFLX stock and Spotify, the world’s largest online music platform, emerging bearish and bullish trends have solidified on and off the price charts after each company’s recent quarterly confessionals.
For Netflix, the company’s mid-July earnings news delivered surprisingly weak subscription data which raised competition concerns about Disney (NYSE:DIS), Amazon (NASDAQ:AMZN) and HBO owner AT&T (NYSE:T), among others. And without hesitation investors have systematically punished NFLX stock in the aftermath.
On the flip-side, SPOT stock announced both top- and bottom-line beats which featured a year-over-year 29% increase to 232 million total monthly active users. The Stockholm-based outfit also added 8 million paying subscribers, though failed to meet the company’s guidance of 8.5 million.
For their part, Spotify investors took shares up as much as 4% last Friday in the immediate aftermath of the report. However, unable to tune out an increasingly bearish market, SPOT bulls only managed to eke out a gain of 0.45%.
The good news is that those earnings are in the rear-view mirror and there’s a pause of sorts on the price charts of Netflix and Spotify. Which leads us to pressing the play button and that pairs trade of NFLX stock and SPOT.
Short NFLX Stock
NFLX stock is the short component in this pairs trade and for good reason. This week shares have broken below a bearish flag formed beneath prior support, the 200-day simple moving average and centered on the 50% retracement level of what had been a bullish-looking corrective base—until earnings throttled NFLX stock. In total, Netflix shares are now unequivocally a short until proven otherwise.
NFLX Stock Strategy
My recommendation is to short NFLX stock today. With volatility elevated, a slightly looser stop-loss of 11% and reducing the size of the short makes sense. This exit attempts to avoid taking losses prematurely while shares remain under pattern resistance.
The reward for allowing a bit of extra exposure is NFLX stock is positioned to move aggressively lower in the coming weeks and months. I’d look to take profits in zone support which stretches from $200 – $231. This area is backed by the December bottom, 62% retracement level dating to Netflix’s three-year cycle low, whole number psychology and potentially sets up a powerful double-bottom price pattern.
Go Long SPOT Stock
It’s been a decent year for SPOT stock, with shares up roughly 30%. And with Spotify’s earnings reaction shares have affirmed this emerging bullish trend with SPOT establishing a fresh higher high pattern slightly above prior resistance.
It’s not perfect price action. Shares of Spotify finished last week in a decision-based doji pattern and SPOT stock’s weekly stochastics are in overbought territory. However, the ability of SPOT to hold inside the doji candle despite the broader market’s own technical misgivings strongly suggests bulls are going to make good on this promising trend.
With Spotify shares inside the doji pattern, but having reversed higher above lateral resistance, my recommendation is to buy shares of SPOT today to complete the pairing with the short in NFLX stock.
To minimize and contain exposure off and on the price chart, setting a stop about 1% beneath the doji’s low makes sense. In return for risk of around 7%, I’d look to take partial profits in-between $175 – $178 and double the downside. Appreciably though, SPOT stock looks like a name destined for new all-time-highs as we move through 2019’s back half of play.
Disclosure: Investment accounts under Christopher Tyler’s management do not own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.
