After finishing 2015 as the top-performing stock in the entire S&P 500, Netflix, Inc. (NASDAQ: NFLX)is down 19.9% so far in 2016. Shares recently plummeted more than 11 percent following disappointing subscriber growth in Q2.
However, after the initial post-earnings sell-off down to around $85, the stock has since bounced back above $91. Could the resiliency of the stock be a good sign, or is the bounce simply a bit of profit-taking by short sellers? Here’s a look at what the chart has to say.
While it’s good news that Netflix has found short-term support in the wake of its second consecutive quarter of disappointing subscriber numbers, the longer-term technical picture for the stock isn’t looking great.
Netflix has now found support at the $85 three times in the past three months. It also found support at $85 during last August’s flash crash. In February, the stock dipped below $85 for a handful of days before bouncing back strongly in the weeks that followed.
Technical patterns aren’t always perfect, and if you assume that February’s dip to $80 was a false breakdown, $85 seems to be strong technical support dating back more than a year now.
Support isn’t really the issue for Netflix; resistance is. Clearly, the stock has been making a series of lower highs since it hit $133 back in December. Coupled with the horizontal $85 support level, the negative-sloping resistance level forms a descending triangle technical formation, a notoriously bearish indicator.
In the short-term, look for Netflix to continue trading within the triangle, meaning support will be at $85 and resistance will be around $97-98. However, that resistance level will continue to decline and pinch the stock into a narrower and narrower trading range, eventually forcing a breakout in one direction or the other. More often than not, when it comes to the descending triangle, that breakout will come to the downside.
If Netflix breaks down below $85 in coming weeks, watch closely for confirmation signs. Traders that sold on February’s false breakout were quickly regretting their trades when the stock bounced back within days. Look for a spike in volume for confirmation, and watch for the $85 level to transition from support to resistance following a true breakdown.
Assigning a target price following a potential breakdown is difficult. Typically, the price projection following a descending triangle breakdown is equal in magnitude to the widest part of the triangle itself. In Netflix’s case, that would mean the difference between $133 and $85, or $48 below $85. In other words, the new target price would be $37.
That seems like an extremely bearish scenario for the stock, so traders should first watch for Netflix to fill the gap in its chart between $70 and $75. The $70 level, which served as resistance in late 2014 and early 2015 could be significant support in the event of a descending triangle breakdown.
Disclosure: the author holds no position in the stocks mentioned.
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