Netflix (NFLX) - Get Report was trading as a strong FAANG momentum stock until it turned on a dime on a negative reaction to earnings reported July 17. The stock beat earnings-per-share estimates extending its winning streak to six consecutive quarters. The problem now is slowing subscriber growth in an environment of having a huge debt load. Today the stock slipped to a post-earnings low following the formation of a "death cross" on Aug. 28. Without a nearby value level, the downside risk is significant. Investors who bought the stock toward its Dec. 26 low of $231.23 can still lock in bull market gains and should do so now.
Netflix closed Tuesday at $289.29, up 8.1% year to date and in bull market territory 25.1% since setting the Dec. 26 low of $231.23. The stock is also in bear market territory down 25.1% from its 2019 high of $385.99 set on May 1. Longer term, the stock is consolidating a bear market decline of 45%, from its all-time intraday high of $423.20 set during the week of June 22, 2018 to its Dec. 26 low of $231.23. It appears that the downside risk is to its "reversion to the mean" at $219.11 and its annual value level at $217.12.
Fundamentally, Netflix is not a stock for value investors as its P/E ratio remains elevated at 115.20 and the company does not offer a dividend, according to Macrotrends. As a FAANG stock, Netflix is a pure play on technical momentum, and its weekly stochastic reading has declined into oversold territory.
Here's some details on the earnings released from July 17, which includes some reasons to counter my bearish call in today's market. The theme is that, given lower interest rates by the Federal Reserve, Netflix debt will be less of a burden and younger viewers will begin a resurgence of subscribers. Only time will tell!
The Daily Chart for Netflix
Courtesy of Refinitiv XENITH
The daily chart for Netflix shows that the stock flip-flopped from a "death cross" to a "golden cross" and then a new "death cross" formed on Aug. 28. Remember that a "death cross" forms when the 50-day simple moving averages fall below the 200-day simple moving average and indicates that lower prices will follow. This is meaningful now as the stock could melt down as there are no nearby value levels at which to buy the stock on weakness. The annual value level lags at $217.12. Semiannual and monthly risky levels at $364.99 and $409.18 are well below the all-time intraday high of $423.20.
The Weekly Chart for Netflix
Courtesy of Refinitiv XENITH
The weekly chart for Netflix is negative but oversold with the stock below its five-week modified moving average of $311.17. The stock is well above its 200-week simple moving average or "reversion to the mean" at $219.10, which is the downside risk. The 12x3x3 weekly slow stochastic reading is projected to decline to 13.15 this week, down from 17.84 on Aug. 30. If this reading falls below the 10.00 threshold, the stock becomes technically "too cheap to ignore" and investors can consider building a position once again.
Trading Strategy: Buy weakness to the 200-week simple moving average at $219.10 and to its annual value level at $217.12. Reduce holdings on strength to its 200-day simple moving average at $334.50.
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 Aug. 30. 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.
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."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.