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ChartWatch: A Terrible Investment but One Great Trade

No one knows the joys and pains of investing as well as Netflix (NASDAQ: NFLX) investors.

For a while, the stock would double or triple in just a year. In fact, the shares marched on an epic climb from $20 to $300 in a little over two years.

But the stock also managed to plunge from $300 to $53 in a little over a year.

Because of this extreme volatility, NFLX is a terrible investment.

But it could be a great trade.

Another knock against buying NFLX for the long term is valuation. The shares have a P/E ratio of 36 and a forward P/E ratio of 71, suggesting earnings will shrink next year. Companies with negative earnings growth can rarely command P/E ratios over 70 for an extended period.

Though valuation is important to investors, traders can largely ignore it.

Moreover, the chart of NFLX appears bullish. The shares have traded in a downward channel since April with lower highs encountering a line of resistance depicted by the blue line below.

This chart shows the price of NFLX shares along with an important declining boundary line to monitor.

Recently, NFLX broke through this line of resistance, suggesting a rally could be forming. More importantly, the shares are consolidating above that previous resistance zone. The 50-day moving average (orange line) is curling higher, which may help to provide support as well.

Between the declining channel line and the 50-day moving average, NFLX should have plenty of support in the $60 to $65 area.

This buying pressure should be enough to bring the shares back up to $70 (blue arrow), which has been an area of selling in the past. However, there isn’t much resistance between $70 and $85.

Over the near term, I’m looking for a rally of about 10% that should bring the stock back to around the $70 level. With any good news, such as a positive earnings report or an analyst upgrade, the shares could break above $70 and back up to $85 for about a 30% gain.

Equities mentioned in this article: NFLX

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