After two months of straight-up rallying in the equity markets this year, we’ve recently hit a stumbling block. So we are now seeing some downside pressure but from relatively high altitudes. For example, yesterday the S&P 500 fell 0.6% yet the so-called fear index VIX spiked 6%. Clearly, we have edgy traders because they have one foot out the door after such an extended rally. The media is unanimous in saying that we’ve come too far and too fast.
But among the mini-wreckage, there are gems that shine. Even during red days like Wednesday, we saw strong buying in stocks like Netflix(NASDAQ:NFLX) and Facebook (NASDAQ:FB) to name two.
Today, I am interested in what the NFLX stock chart is telling about the mid-term future of the stock. And therein lies the opportunity. But first I have to share my overall bias in the equity markets: I still believe that the bulls are in control here and that without any new shoes to drop, the S&P is brewing another leg higher once this tizzy ends.
So my comments about Netflix stock today are inside the assumption that we are not on the verge of a severe market-wide correction.
Let me preface this by giving you the end-statement first: Regardless of what is the end game is for NFLX fundamentals, the stock here has a mega breakout brewing worth $100 of potential upside.
Now for the bad news. Fundamentally, NFLX is very expensive as it sells at a price-to-earnings ratio of 135. But I am willing to overlook that fact because this is a hyper-growth stock, so the value is not how I judge it. For now, I accept that they need to spend to grow.
I say that while I gulp because the amount of money they spend on content is insane. But for now, this is the hook that they need to continue executing on their global domination plan. So Wall Street gives NFLX stock a pass on valuation, but not if they start slowing the new signups, especially overseas.
Their CEO does a great job exuding confidence and keeping its fans believing that all plans are still on track. This is even in the face of massive competition knocking on the front door. The list includes mega caps with deep pockets like Disney (NYSE:DIS), Facebook and Alphabet(NASDAQ:GOOG, NASDAQ:GOOGL).
Yes, NFLX has the first mover advantage, but that can change fast. I acknowledge that NFLX would have levers to push back on the threat like raising prices or dialing back spend but that also would change the terrain.
In summary, the fundamentals here are not as important for as long as they can deliver on growth. But today’s opportunity is of the technical nature. I already noted that yesterday, Netflix stock shined. It closed up 1.50%, while the markets could not hold a bounce all day. This tells me that there is an appetite for NFLX.
I don’t even need to know the reason why. If I am right about this market hiccup being temporary, then as soon as we stabilize, I expect NFLX stock to spike.
Before we look at upside from here, it’s important to note that the stock is up 55% from the December crash. So any upside bets from here carry the risk of a fade, especially if markets continue to fall. So I keep the risk size in check so it doesn’t break the piggy bank.
Bottom Line on NFLX Stock
After the NFLX earnings report, the bears tried to kill it and succeeded to push it down 10%, but the bulls spiked it back up 15% from that dip and now it’s itching to set another higher high. When a stock sets higher lows for weeks, its momentum is in the hands of the buyers. This is also the case for NFLX stock, so it’s a legitimate rally.
In fact, technically, I can argue that the buyers already triggered a bullish inverse head and shoulders pattern with a potential target near $450 per share. Yes, I know that sounds impossible, but I am merely judging the chart on its face value with no bias from my opinion of the company. And remember that I am not a fan of its model as it is right now for the long run.
Meanwhile, there are short-term levels that are important to make or break this mega breakout. If the bulls can break through $370.50, they can invite more buyers. But I think this accelerates once they clear $380.50 and $387.30. So those who are long should stay long while they watch for these triggers to expand.
Conversely, if the bears can push NFLX stock below $347.50, then they can target $320 with stopover at $338.50. If the bearish scenario triggers and the selling persists past the mini support levels, then I expect it to have much stronger support the closer it gets to $300 per share.
The rise in Netflix stock was very fast, so on the way down it is possible that they overshoot, but eventually, it will find its footing. The only way I see this one setting new lows is if the markets retest the December lows.