The good news is that Netflix (NASDAQ:NFLX) stock dug itself out of a hole, as it recently rallied sharply to catch up with the S&P 500 this year. Back in September, though, it was a different story. There were very few fans of Netflix stock as it was falling into an abyss, and the stock lost 33% from its 52-week high back in April before it finally bottomed.
Back then, I wrote about the opportunity of upside in NFLX because it had fallen into support. The lows from Christmas of last year turned out to indeed be solid footing for this rebound rally. Since then, NFLX stock mounted a 35% rally which should have more to go. This is a profit of $80 per share for those that were on board, and the average target is still around $25 higher but with a cautionary note.
Today’s point is to highlight the possibility of some resistance here. This target is the ledge from which the stock failed hard at the end of July, and back then, it was unable to fill the gap from the July earnings report.
Netflix is an emotional stock, and in that sense, it is like Amazon (NASDAQ:AMZN). They have dedicated haters who will never change their mind about them — and on the other side, have mega-fans who will not be swayed. Somewhere in the middle lies the truth.
Today’s message may come across as negative, especially to fans. However, the intent is not to suggest to short Netflix, but rather to exercise patience before deploying new risk. The temptation is there because of a giant open gap all the way up to $363 per share. It may eventually fill it, but it may also need a few failed efforts first.
Long term, the story is the same. Fundamentally, Netflix stock is not cheap, and it sports a three digit trailing price to earnings ratio. Nonetheless, this is not a traditional stock, so I don’t judge it by traditional methods. So far, Wall Street has given Netflix a pass on valuation because of its global growth potential.
It serves a market that is massive and is in its infancy stages. The whole world is migrating its media consumption from cable boxes in living rooms to handheld devices on the go. People want to stream their movies and shows, so those who long the stock for those reasons need not fret the short-term action.
Meanwhile, Netflix stock may suffer as it adjusts to deal with the coming competition. So far, the company has a big lead and everyone else is playing catch-up. Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) to name two, plus all the traditional media are fast on its heels. But, under the leadership of CEO Reed Hastings, management seems comfortable that its massive, $20 billion yearly budget on content gives NFLX an insurmountable edge.
Trade Netflix Stock Regardless of the Fundamentals
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Love it or hate it, Netflix stock is definitely worthy of trading. It always has momentum, so it moves fast in both directions. Lately, the bulls have been in charge, as it has led a rally from the earnings dip. This has really accelerated since Dec. 10, and the natural urge is to buy NFLX stock here.
The chart, though, suggests that it’s best to wait out a few candles. This is not a knock against the stock, but a cautionary note over the level at hand. Back on July 26, Netflix had a similar setup. It was in the middle of a long rally and had just overcame resistance. Unfortunately on the next trading day, it fell off a cliff into the September lows. The high on July 26th was $336 per share, so the bulls have something to prove here. We are in the same zone again, so the burden is on buyers to prove this time they won’t fail.
Until then, I can assume that this will again be resistance. Ideally, price should fade a little to gather more momentum and breakout. This setup is eerily similar to July, so it’s worth missing out on a few bucks so see how this battle will shake out. The human urge is to buy the shares right here, but waiting for the breakout confirmation then chasing it has lower odds of failure.
Bottom Line on NFLX
If I am long Netflix, I can hold it or sell calls against it while this happens. Giant earnings gaps are tougher to fill than smaller normal ones. Nevertheless, the overall equity markets are very bullish and sentiment is the exact opposite of last year this time.
So, the bulls have help.
I don’t believe that this is an opportunity to short because shorting a momentum stock like NFLX in this bullish market is dangerous. So, the decision today is whether to chase it or not — and the chart suggests that waiting out a few candles around $336 per share is sane.
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 for free here.
