Netflix Is Heavily Damaged and Headed Even Lower -- Here's How to Trade It Now

Netflix investors should be prepared for another down leg -- which should lead to a lower-risk entry opportunity.
By Gary Morrow ,

Netflix (NFLX) - Get Report suffered a damaging blow Tuesday morning after a very disappointing earnings report. The stock finished the session with a 13% loss as downside volume exploded. The huge breakdown gap Netflix left behind on the opening bell will take some time for the stock to recover from. Since then, the stock has held key support near the $85 area, but it's doubtful that a bottom has been reached.

In the near term, investors should not be surprised by another leg lower.

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Netflix left behind back-to-back monthly lows near the $86. After the first in mid-May, the stock quickly recovered but was turned away near a declining 200-day moving average. In late June, with the help of the Brexit panic, Netflix returned to the same support zone and once again mounted a quick rebound. This one, though, was a much shallower version as shares remained well below a heavy 200-day moving average.

With the stock now back down to the recent lows, overhead pressure is gaining strength. Another hold near the May/June lows appears unlikely.

For patient investors, a clear break below last month's low will eventually result in a lower-risk buying opportunity than currently available. Netflix bulls should view a retest of the 2016 lows, set back in February just below $80, as a positive. If the stock can regain its footing here, along with a divergent MACD bottom, a fresh rally leg could be on the way.

Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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