Another ugly day for stocks on Tuesday was led lower by the largest sector of the S&P 500 as measured by market capitalization — namely the technology sector. Among the carnage were shares of Netflix, Inc. (NASDAQ:NFLX), which were tagged with a -6.1% selling spree and all else being equal now looks to have lower levels to test still.
I have discussed the risk of the grossly overweighted technology sector as a function of market capitalization weighted indexes for months and quarters now in this here column. While we want to continue respecting the growth components of some of these mega-cap technology stocks, many investors have not only become much too overweight on these stocks but since these stocks are treated as a theme rather than single-stock stories, when selling kicks in, most if not all of these stocks get dumped as a basket.
As a point of reference, when I last mused about NFLX stock on March 9 when it was trading near the $320 mark I offered that the stock remains overextended and ultimately stands good chance of another mean-reversion move lower toward $280 as a next downside target. This move is now well underway and an updated is warranted.
Netflix Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the multiyear weekly chart, not much has changed since my last update on March 9, meaning that the stock through this lens remains notably overbought. The stock is still trading significantly above its longer-standing channel (black parallels), and momentum as measured by the MACD oscillator at the bottom of the chart is still sky high.
The weekly candlesticks did, however, show exhaustion and some initial selling over the past couple of weeks, which all else being equal might keep a lid on the stock for a while now.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, note that NFLX stock topped out on March 12 (right after my last update on the stock) and has since broken its 2018 up-trending channel. Yesterday the stock had a so called bearish outside reversal day (along with much of the Nasdaq 100), which now puts the yellow 50-day simple moving average in focus as a next downside target.
This moving average currently lines up with the $280 area, which is the downside target I initially laid out on March 9. Active investors and traders could now look to play the stock toward this next downside target, keeping in mind that the next few trading days with month and quarter-end could provide further volatility.
Tell us what you think about this article! Drop us an email at editor@investorplace.com, chat with us on Twitter at @InvestorPlace or comment on the post on Facebook. Read more about our comments policy here.
Take Serge’s quiz to find out which trading strategy best suits your personality.
