Last night, Disney (NYSE:DIS) reported disappointing earnings for many reasons, but the one bright spot was the news about their Disney+ streaming product. While this is competition to Netflix (NASDAQ:NFLX), it also helps NFLX stock. If streaming is the one bright spot for Disney, then Netflix is in the right place and at the right time!
It is it important for investors to remember that this is a tough stock to trade. Netflix runs fast in both directions. The stock almost never gives you a clear entry or exit point, so you either need great conviction for a long period of time or specific action plans on the charts.
I want there to be no mistake — I don’t think this is an obvious point of entry without a trigger. Nor I am not a perma-bear on Netflix in fact In December I wrote about the upside 2020 potential from $320 per share.
NFLX Stock Has Been Technically Perfect
The best recent opportunity in Netflix stock came early in April when it broke out from $382 per share. That triggered a measured move that priced out perfectly to $450 per share. Technically, this can extend much higher but usually after a big rally like this investors need to rest.
This explains the dip back down to $393 per share. It is totally acceptable for a breakout rally to revisit the neckline from which it broke out. Bulls need to know that they have solid footing underneath their feet before they can continue on higher.
For the last few days, Netflix stock has been stuck between two levels and they will be the next potential catalysts or triggers. The first is near $431 per share. The buyers need to break out from that to challenge the highs. Otherwise, the bears will try to break through the recent support near $392.
This is a perfect example how it’s easy to get lost trading Netflix. Long-term investors commit to owning the stock for a super long term. For the rest of us, the goal is to avoid the obvious mistakes by more actively trading it. Buying Netflix up here without an actual trigger could be one of those mistakes.
This is not the same as saying short to stock. I am saying chase to breakout but pick your levels carefully. Not every investor has the same time frame, so finding one spot that works for everyone is ridiculous.
A break above $432 would bring in buyers, and if they can manage to break out from $450 then the rally is on like Donkey Kong. Otherwise a swoon towards the prior neckline is a buying opportunity with a tight stop. Why a tight stop? Because if that’s lost then it triggers a bearish $30 rally or more in the wrong direction. This is as unbiased an opinion as you will get for NFLX stock.
Let’s Add Some Fundamentals to this Movie
Netflix is not cheap — it has a trailing price-earnings ratio of 84 and its sells at nine times its sales. But “cheap” is not what you look for in a growth company. So as long as Netflix is delivering the growth they promise, then investors can overlook froth. From what I’ve seen from their earnings report, management benefited from the Covid-19. The results were well above expectations. This buys them time and for now bloat is okay. But at the first hint of slow down this assumption will disappear and the stock will be at risk.
There are some investors who can never stomach expensive stocks. These are the ones that shorted Amazon (NASDAQ:AMZN) for a decade before admitting defeat. So it’s best that investors define their investment strategy before they stubbornly fight a stock.
“Don’t fight the tape” is the best way to trade Netflix, and if you’re armed with technical knowledge this becomes a much easier proposition. The best stock tip I can give you is to expend a little effort learning charts. There are simple concepts that you can learn once and apply for a lifetime. Stay safe.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
