When streaming-video giant Netflix (NFLX - Get Report) reported earnings after the close on Oct. 16, the share-price volatility was mind-blogging. In the first two minutes the stock dropped to $265, then popped to $304.60. Traders and investors could not decide on which key metric to focus.
I think the bottom line was relief that the overall results were not disappointing. The stock eventually moved as high as $318.79 in after-hours trading, but you won't see this print on the charts. My call is to reduce holdings on strength to its risky level for October at $315.56.
At 4 p.m. on Wednesday the stock closed at $286.28 and the weekly chart suggested that a positive reaction to earnings was the logical outcome. My call on Sept. 27 was to "Buy Netflix as the Stock Is Technically 'Too Cheap to Ignore'" and the stock closed that day at $263.08. This buy signal set the stage for the positive reaction to earnings seen today.
The stock's year-to-date volatility shows that the stock is in both a bull market and a bear market. It closed Wednesday 23.8% above its Dec. 26 low of $231.23. The stock is 25.8% below its 2019 high of $385.98, set on May 1. The stock is not one for value investors, as its P/E multiple is elevated at 111.97 without a dividend, according to Macrotrends.
When the stock was technically "too cheap to ignore" on Sept. 27, its weekly slow stochastic reading was below 10.00 on a scale of 00.00 to 100.00, which is a buy signal looking for gains of at least 10% to 20%. Momentum or FAANG stock buyers were advised to increase long positions.
The confused and volatile earnings reaction was caused by varying metrics. Netflix beat on earnings per share for the seventh consecutive quarter. It missed on revenue and overall subscriber growth. But it reported that international subscriber growth was strong. Content seems to be king, and longer term, Netflix will continue to dominate.
The Daily Chart for Netflix
Courtesy of Refinitiv XENITH
The daily chart for Netflix shows the volatile ride since the stock set its all-time intraday high of $423.20 on June 21, 2018. The chart also shows that the stock is consolidating the 45% bear market to the Dec. 26 low of $231.23. Dec. 26 was a positive daily "key reversal" as the Dec. 26 close of $253.67 was above the Dec. 24 high of $250.65. Thus 2019 began with a technical buy signal. The year began with an annual value level of $217.12, which has not been tested. The semiannual pivot for the second half of 2019 at $364.99 failed to hold following the negative reaction to earnings released on July 17. The close of $267.62 on Sep 30 was input to my proprietary analytics and its monthly risky level for October is $315.56 and its fourth quarter risky level is above the chart at $436.35.
The Weekly Chart for Netflix
Courtesy of Refinitiv XENITH
The weekly chart for Netflix will end the week positive if the stock ends this week above its five-week modified moving average of $290.18. The stock is above its 200-week simple moving average or "reversion to the mean" at $223.92. Back in February 2013 the stock was a buy at $16.94 when the "reversion to the mean" was crossed to the upside. The 12x3x3 weekly slow stochastic reading is projected to end this week rising 20.94 rising above the oversold threshold of 20.00 as a technical buy signal. Back on Sept. 27 this reading was below 10.00, which made the stock "too cheap to ignore" technically. Since Sept. 27 the stock is up 17%.
Trading Strategy: Reduce holdings on strength to its monthly risky level at $315.56. Add to positions on weakness to its "reversion to the mean" at $223.92.
How to use my value levels and risky levels:
Value levels and risky levels are based upon the past nine monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play.
The close at the end of June 2019 established new monthly, quarterly and semiannual levels. The semiannual level for the second half of 2019 remains in play.
The quarterly level changes after the end of each quarter so the close on Sept. 30 established the level for the fourth quarter. The close on Sept. 30 also established the monthly level for October as monthly levels change at the end of each month.
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.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."