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Monday, November 29, 2021

Chart Of The Day: Netflix Weakness Just Profit-Taking; Next Leg Could Be Higher

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Streaming entertainment giant Netflix (NASDAQ:), is schedule to release Q3 2021 earnings on Tuesday, Oct. 19 after market close. Forecasts are for $2.58 EPS on $7.48 billion in revenue. That’s significantly higher than the $1.74 EPS and $6.39 billion the company saw for the last year.

Netflix shares, along with other mega cap tech company stocks, have underperformed this year, as investors looked forward to the economic restart. Indeed, NFLX is up 17.2% in 2021, while the gained 19% during the same period.

So, does the future look bleak for those stocks that were pandemic darlings?

Not according to analysts who expectation its key metric, subscriber growth, to indicate a rebound toward the year end. 

But so far in 2021, the company added 5.52 million net subscribers, significantly lower than the 25.86 million additions seen in the first half of 2020, when people were stuck at home during the height of the pandemic. Nevertheless, analysts are counting on content to pull in more viewers.

From a purely fundamental perspective, Netflix is trading at its lowest price-to-earning ratio in almost five years, 66.46, significantly below the 123.38 for the broader industry. However, from a technical standpoint, the price action is looking very positive.

Netflix has been trading according to a falling flag pattern. Given that it developed after a spike of $52 within four trading session, the downward bias of the range is considered profit-taking by those who enjoyed the previous moves.

The price has been holding, demonstrating that interest in the stock continues, presumably from new bulls who may be upset they missed the first round, but are gearing up for another push higher.

The flagpole bounced off the uptrend line, strengthening the view that the stock will continue along its underlying trend.

Trading Strategies

Conservative traders should wait for the flag to complete with an upside breakout, then wait for a pull-back that will prove support.

Moderate traders would wait for the same price action, the upside breakout and the following return-move, for a closer entry, if not for further confirmation.

Aggressive traders could move on the breakout, the daily close that follows it, or even now, provided they accept the higher risk that goes along with the desire for the higher reward that comes from moving before the rest of the market. Therefore, money management is key for successful trading. Here’s an example:

Trade Sample

  • Entry: $625
  • Stop-Loss: $620
  • Risk: $5
  • Target: $675
  • Reward: $50
  • Risk:Reward Ratio: 1:10

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