At the end of September, I posted a chart review suggesting that while Netflix (NFLX) had reached the original $110 downside target, more downside was to come. The stock proceeded to bounce on a small relief rally that hit a brick wall at resistance. This brick wall was so strong that in the same day, NFLX fell all the way back to its 52-week low before a tepid bounce. The stock is now back to the brink of further downside.
NFLX will not regain positive momentum until the stock can form a base. Holding the current trading range would be a positive step (although I do not believe it will hold long). Once a base forms, the potential upside for NFLX could be large, but it will require some strong, new positive catalysts and a process of valuation reflation.
Source: FreeStockCharts.com
The chart above shows a very bearish continuation pattern similar to what is known as the bearish falling three methods. Worsening the implications of this pattern are two things: 1) the rest of the market rallied strongly on the day with the NASDAQ up 3.5%; 2) NFLX was up as much as 11% in the pre-market before closing the day DOWN 5%.
This extremely negative relative performance and strong fade both demonstrate the sellers remain fully in control, and they have yet to get washed out of the stock. The latest catalyst for this volatilty was a near mea culpa from NFLX CEO, Chairman, and Founder Reed Hastings titled “DVDs Will Be Staying at Netflix.com.” On the surface, this sounds like the good news from a responsive company: the customers demanded, the customers win. However, in the wake of the CEO’s staunch confidence that the original strategy was the correct one, this latest news release contained elements showing that the company is making more of a PR move rather than a fundamental shift. Prices are remaining where they are, and Hastings notes: “There is a difference between moving quickly — which Netflix has done very well for years — and moving too fast, which is what we did in this case.” In other words, look to NFLX to figure out other ways to accomplish its original strategy to separate the DVD and video streaming businesses.
Ironically enough, analysts were also left wondering whether this acquiescence signals NFLX continues to bleed subscribers at an alarming rate. Moreover, another analyst lamented that this move likely means that NFLX is no longer positioned for an acquisition by Amazon (AMZN) (Wedbush analyst speaking on CNBC). When the market finds ways to turn marginally good news into very bad news, look out.
Be careful out there!
Full disclosure: long AMZN puts