NEW YORK (TheStreet) -- If you're a current Netflix (NFLX) - Get Netflix, Inc. (NFLX) Report investor, you're probably ready to boycott Apple's (AAPL) - Get Apple Inc. (AAPL) Report or Amazon's (AMZN) - Get Amazon.com, Inc. Report websites.
Netflix is not adding as many subscribers as investors had hoped, and it's no surprise why. With so many content delivery choices available, a budget "one size fits all" model has limitations. Netflix has 30 million subscribers and not one of them is offered any products beyond the basic service.
It's money that Amazon's Prime and Apple's iTunes doesn't leave on the table like Netflix does. More important for now, how can Netflix's crash turn into profits?
Based on my experience with gap-downs following missed expectations similar to Netflix's, the odds favor Friday or Monday marking the short-term low. Strong gap-downs based on earnings releases historically take a day or two before sellers finally take a rest.
Bargain hunters and short sellers covering positions could push the price up about 50% in relation to the gap-down price. Looking at the chart, I expect short-term resistance near $70. Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $60 a share today, but also be prepared for a closing under the open, and a more than 50% chance of a close under $60.
If you are looking for Wednesday's drop to signal a buying opportunity, you are likely going to find the end of the day Friday better than today. There is no hurry jumping on board with Netflix.
Stocks dumping as a result of earnings misses usually take a full two good earnings quarters to recover. Take your time and do your homework before allocating capital here. Look for the second break above $72.50 as the one that "sticks." (Read my
Will Apple's Shot at Google Hit RIM and Netflix Instead? article
Want to see a classic missed earnings result a few weeks after the fact? Take a look at
Bed Bath & Beyond
Bed Bath & Beyond disappointed and traded from $73 down to an intraday low under $60.61. Also, take close note of the next few days after earnings. This is a classic pattern I see often, and you can, too. Simply use your software to look at charts from the past few quarters and review the ones that gapped down the next day. The high placed a couple of days after the gap down in Bed Bath & Beyond is now resistance.
Another recent earnings gap down is
. Dell disappointed and traded from $15 down to an intraday low of $12.31. Also, take close note of the next few days after earnings. This is a classic pattern I see often, and you can too. Simply use your software to look at charts from the past few quarters and review the ones that gapped down the next day. The high placed a couple of days after the gap down in Dell is now resistance.
We know why Netflix is struggling. Apple's computer sales and Amazon's willingness to forego profits are crushing other online content providers like a winery crushing ripe grapes during harvest. After Apple produced one of the greatest earnings beat in the history of tech two quarters ago, and with iPad sales remaining strong, it doesn't take a leap of understanding to figure out someone was going to end up short.
What's the best play with Netflix? There should be a very attractive trade coming up Friday and or Monday. Near the end of the day, if still trading lower, sell out of the money puts. Fear of continued losses tends to push option premium prices up dramatically, while at the same time the stock should bottom.
It's not one to get greedy with. Hold on for a few days and as the implied volatility falls (hopefully with a nice dead-cat bounce) exit out with a quick hit and run for profits.
Otherwise, for longer-term investors, the best play is to wait until we are closer to the next earnings release for an entry.
At the time of publication the author did not hold a position in any stock mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.