Shares of Netflix (NASDAQ:NFLX) exploded nearly 7% higher last Thursday yesterday on the heels of a positive analyst note. Friday’s action took Netflix stock up another 1%.
These moves followed a decidedly mixed earnings report Tuesday that had something for both the bulls and bears to chew on. Concerns continue to linger over cash burn and and now North American subscriber growth has been added to the list. Look for the red hot rally in Netflix stock to cool over the coming weeks.
Thursday’s big rally was set off by bullish note from Stifel analyst Scott Devitt, who maintained that the Comcast’s subscriber loss (133,000) would be a gain for Netflix. This despite the fact that Netflix projected a gain of 7 million subscribers in the first quarter, more than 10% below expectations for 7.82 million. The small subscriber loss for Comcast, even if converted at 100%, would make for a small opportunity for Netflix.
Netflix Stock Technicals Seem Overdone
The technicals are looking a little overdone for NFLX. Netflix stock has rallied sharply to fill in the post-earnings gap from July. MACD continues to languish, however, and hasn’t confirmed the latest leg higher.
Bollinger Percent B — the closing price as a percentage of the lower and upper Bollinger Bands — just blew out past 100 which has been a reliable indication of an impending short-term top over the past year. NFLX continues to trend higher but is once again at a big premium to the uptrend. The prior four instances when Netflix stock traded so far above trend ultimately led to a pullback to the trend line.
More importantly, Netflix stock reversed sharply off the highs on Friday. NFLX rallied to nearly $360 before reversing course sharply to close well off the highs at $353.16. This type of price action is many times emblematic of a short-term top in the stock. Buyers have become exhausted and sellers have taken control. It is an even more-powerful signal given the magnitude of the prior rally.
Once Bullish, Now Looking Bearish
In my previous analysis on Netflix stock from November, I had a decidedly bullish outlook for NFLX. My upside price target at that time was $340, which was just recently achieved. Now that Netflix stock has rallied nearly 15%, my bullish opinion has become somewhat more bearish because price does matter. The technical and fundamentals that looked attractive when Netflix stock was below $300 now look more bearish given that NFLX is over $350.
Stock traders should look to short these shares on any further strength. An initial downside profit objective would be a move back to the trend line (and now the 50-day moving average) at the $320 area. The ultimate downside target would be a test of support at $280. A meaningful breakout past the recent highs at $380 would serve as a viable stop out point.
Options traders may want to consider pre-positioning to be a seller at higher levels with an out-of-the money bear call spread. The Feb $362.50/$365 call spread can be sold for a 75 cents net credit. Maximum gain on the trade is $75 per spread with maximum risk of $175 per spread. Return on risk is 42.85%. The short $362.50 strike provides a 2.5% upside cushion to the $353.16 closing price of Netflix stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
