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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.

http://stockcharts.com/c-sc/sc?s=NFLX&p=D&yr=1&mn=0&dy=0&i=p71426455593&a=269630122&r=1350423683988

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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