Did Netflix’s Post-Earnings Dive Damage Its Technical Picture?

By: Wayne Duggan

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.

A Bearish Sign

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.

Levels to Watch

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.

Confirmation and Target Price

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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