It's been a rough year for
(NFLX - Get Report)
in 2012 -- shares of the video content firm have dropped almost 36% in the last six months. But NFLX could finally be finding a bottom. Here's how to trade it.
The bottoming setup in play here is the exact same one that shoved Bank of America 14% higher at the end of the summer: the double bottom. Netflix made two swing bottoms around $55, separated by a swing high at $65. That $65 level was the breakout level for NFLX, and it triggered last week. Since then, shares of the firm have been consolidating sideways as investors weigh their options on where to go from here.
>>5 Big Stocks to Trade This Earnings Season
In real terms, the double bottom indicates exhaustion among sellers. At $55, buyers are significantly more eager to jump in and buy then sellers are to keep selling, a fact that's evidenced by NFLX's ability to make two swing lows at approximately the same price. Buyers regained control after the second bottom, which is why shares were able to break out. Still I'd be cautious about this stock - Netflix hasn't exactly been a bastion of strength of late. The consolidation isn't a bad thing, but I'd wait for a close above the dashed trendline resistance level before buying.
As always keep a tight stop if you decide to be a buyer here. Netflix's volatility means that it could snap higher quickly, but buyers could drop again out just as fast.