Is Wall Street’s Netflix Love Affair Over?

Editor’s Note: I’m pleased to introduce our newest contributor to Daily Profit. Evan Lazarus is a professional Wall Street trader who has built his own proprietary trading firm. For the past 10 years, he’s been teaching traders how to use technical analysis to make better trades. We hope you find value in his trade ideas and lessons.
In the context of investing, sentiment is how you feel about a stock. Sentiment is not how you feel about a company, and sometimes it can be difficult to separate our feelings about a company from our feelings about a stock. It’s difficult, but necessary.
Sometimes investor sentiment about a stock can create an ideal setup for a trade. And that’s exactly what’s happening with one very popular stock right now.
Today, I’ll examine Netflix (NASDAQ: NFLX) and how sentiment is affecting this stock.
Netflix fits the aforementioned mold perfectly. Great story, committed and loyal fan base, and a rapidly rising stock price to accompany the Netflix love affair.
But let’s for a moment move aside all our biases about the company and take a look at price. Price is, after all, the clearest representative of sentiment and can therefore be very telling about when the feelings change – whether you choose to accept it or not.
Let’s look at a two different charts of Netflix so we can visually highlight what I’m seeing.
The first chart below is a monthly chart where every candlestick represents one calendar month of trading.
Netflix love
Stocks don’t typically go from strong to weak. There is usually something that signals a shift occurring before the stock actually breaks down.
In the chart above, that signal appears to be what is commonly referred to by technicians (observers of price) as a “double top.” It’s a place where a stock finds too much supply (resistance) and retreats in price, only to retest that supply again on the second attempt. However, the stock sees a much larger initial decline as the shift is now occurring.
We saw a double top occur with Netflix stock when it saw resistance in August 2015 and then retested that excess supply in December 2015. Once the stock failed to trade higher in December, the sellers quickly stepped in and we saw the price drop from the low $130s down to about $80.  From there, the stock rebounded to about $110 through April before beginning to turn back down again.
This type of price action indicates the buying pressure is not the same as what it once was and that the winds of change are blowing.
Here is another view of Netflix stock from a weekly chart, which shows a bit more trade detail.
Netflix love affair
You can get a more detailed look at the double-top pattern through this vantage point, which shows the initial selloff that occurred from December through February, as well as the rebound that followed from February through April.  After trading just shy of $112 in April, the stock has since come off once again to current levels in the low $90s.
Over the next several months – and possibly into next year (if not sooner) – I anticipate that Netflix shares are gearing up to trade back to the $50 area.
Why that area? It represents the largest area of previous demand (support) and should act as a natural magnet in the event of a reversal in price.
As for how to trade it, I would advise using any short-term strength over the next few weeks as an opportunity to either short sell the stock or unwind from this position if it’s currently in your holdings. (Please note that I do not advise shorting any stock unless you are experienced in doing so and are familiar with the risks involved.)
I have also noted the $70 area as a minor support area. This represents an area where we see short sellers cover and buyers look to step in, but ultimately I see this trade wanting to test back into that major support zone over time.
So what does this all mean? It means that I see Netflix stock potentially getting a serious haircut in price over the next several months as predicated by the sentiment (patterns) and price action currently in motion.
I love my Netflix as much as the next guy, but I’m in the markets to make money, not for love of a company.

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