We continue to get a lot of earnings reports…so although the broad stock market did not do much yesterday, some individual stocks did see some big moves. One of those was Netflix (NFLX)…which fell over 3.5% after they reported yesterday. So where does this leave the stock…and what should investors do right now? Well, sometimes the best thing to do on a specific stock is nothing…and we think this is the case with NFLX at the present time. However this “do nothing” strategy will almost certainly change pretty quickly. The reason we say this is because NFLX is at a key juncture on the technical side of things.
The stock is approaching its 200 DMA. The last time it touched that level (back in very late December/early January), it bounced nicely. However, we’d also point out that when NFLX broke below that line back in July, it began a decline that took the stock down by more than 20%.
Therefore, if NFLX breaks below that line again in any significant way, it’s going to be quite negative for the stock. HOWEVER, if it can hold that line once again and bounce, it should be very positive for the stock…because it is getting close to seeing a “golden cross.” Since the financial crisis, NFLX has seen five other “golden crosses” and they have been followed by rallies of 8%, 21%, 103%, 107%, and 35%. Thus, since a bounce off the 200 DMA would almost certainly coincide with a “golden cross,” it should be very bullish for the stock.
In other words, there is no need to make a big bet right now. The next substantial move should be a very big one, so there is no need to be “early” in the trade…especially since it is difficult to know which way it will “break.” If you wait and see whether NFLX is going to break meaningfully below its 200 DMA or bounce strongly off of that line, you should still be able to profit greatly on the move it makes AFTER we know which way it is going to “break.” If history is any guide, the ensuing move will be 10% or more and thus missing the first few percentage points of the move won’t matter much. In fact, it will merely be the cost of insuring the bet is a profitable one. (Two charts below.)
To get comments like these on a daily basis (as well as my weekend piece), please click here to subscribe to "The Maley Report" (TheMaleyReport.com).
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.