Netflix Reports in a Trading Range as Earnings Volatility Looms
TheStreet
Netflix (NFLX) - Get Report opened Tuesday, July 16, between its semiannual and monthly pivots at $364.99 and $377.42, respectively. This sets the stage for upside or downside volatility when the streaming video leader reports second-quarter earnings after the closing bell on Wednesday, July 17. My call is to react to the volatility with a strategy to buy the stock on weakness to its 200-day simple moving average at $338.10.
Netflix closed the first half of 2019 at $367.32 on June 28, which became a key input to my proprietary analytics. The only level left over from the first half of 2019 is its annual value level at $217.12, which is well below the price action seen on the charts below.
The daily chart shows a "golden cross" and the weekly chart has been positive since the week of June 21, but will be downgraded given a close this week below its five-week modified moving average at $365.84.
Fundamentally, Netflix is not a stock for value investors as its P/E ratio is elevated at 133.30 and the company does not offer a dividend, according to Macrotrends. Netflix is the first of the five FAANG stocks to report second-quarter results. The stock is a pure play on technical momentum and its weekly stochastic reading is rising.
Analysts expect Netflix to earn 56 cents to 60 cents per share when it reports after the close on Wednesday, July 17. Stifel expects the subscription price increases to bring the streaming video giant near to being cash-flow positive.
Earlier this year Netflix announced increased that it raised monthly subscription price to $13 on its U.S. subscriber base to cover increasing content costs. Netflix will be increasing spending to stay ahead of new streaming competition from Amazon (AMZN) - Get Report , Disney (DIS) - Get Report and AT&T (T) - Get Report . Netflix is expected to burn through $3 billion in 2019 for content.
Netflix reported strong first-quarter earnings on April 16 and the stock responded by setting its 2019 intraday high of $385.99 on May 1. This extended the company's winning streak in terms of beating earnings-per-share estimates to five consecutive quarters.
Longer term, Netflix is consolidating a bear market decline of 45.3% from its all-time intraday high of $423.20 set on June 21, 2018 to its Dec. 26 low of $231.23. At Monday's close of $366.60 the stock is strong in 2019 with a gain of 37% year to date and in bull market territory 56.5% since its Dec. 26 low. Even so, the stock is also in correction territory 13.4% below its June 21, 2018 high.
The Daily Chart for Netflix
Courtesy of Refinitiv XENITH
The daily chart for Netflix shows that the stock has been above a "golden cross" since March 13, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices lie ahead. Even so, the stock slipped to a test of its 200-day simple moving average at $336.69 on June 3 and at $337.29 on June 14 as buying opportunities. The close of $367.32 on June 28 was an input to my proprietary analytics and resulted in the following key levels. A monthly pivot for July is $377.43, which should be a magnet. Its semiannual pivot is a magnet at $364.99, with a quarterly risky level above the chart at $471.27.
The Weekly Chart for Netflix
Courtesy of Refinitiv XENITH
The weekly chart for Netflix is positive with the stock above its five-week modified moving average of $365.84. The stock is well above its 200-week simple moving average or "reversion to the mean" at $212.38. The 12x3x3 weekly slow stochastic reading is projected to end this week at 66.17, up from 60.62 on July 12. A close on Friday below $365.84 downgrades the weekly chart to neutral.
Trading Strategy: Buy weakness to the 200-day simple moving average at $338.10. Reduce holdings on strength to its risky level for July at $377.42. This level has been a pivot or magnet between July 3 and July 12.
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How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, the latest on June 28. The quarterly level was changed at the end of June. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.