Tuesday, October 22, 2013

Netflix (NFLX) price action post earnings...

Today's price action in Netflix caught my eye so I wanted to create a separate post on it today, rather than wait until the weekend. Netflix (NFLX) reported it's quarterly earnings after the bell yesterday.
The outcome was that its net income rose 315% to $31.8 million for the quarter that ended Sept. 30. Earnings per share of 52 cents beat analysts' average estimate of 49 cents and revenue rose 22% to $1.1 billion.

The stock soared almost 10% after the announcement and opened the trading session near the $400 level. However those price levels attracted some high volume sellers and the outcome was an outside reversal day to the downside on heavy volume. Now this does not necessarily mean that the top is in and it certainly doesn't mean it is now headed below $100 or some outrageous price target. But price action like today does usually mean that there is a high probability of some follow through to today's reversal trend.

The chart above is a weekly price chart of Netflix since it's inception going all the way back to 2002. I've noted on the chart how today's open actually matched and exceeded it's last major bull market run from it's all time low to it's 2011 bull market high. Just like we saw in Google during last week's post, these type of measured moves can be important. And when we see price action like what we saw today it can be telling.

So know let's look at a daily price chart and focus on this current bull market run from the 2011 lows. Each correction has been between 40-50 points in length and around 15-19%. Today's drop has already produced a 67.66 point drop.

I am going to place resistance now at the $355 level, which is the prior closing high, approximately the midpoint of today's range, and it stands as the point in which the current bull market matches the size of the 2002-2011 bull market. If we can trade above then this may be a shakeout, but as long as we remain below the probabilities favor lower prices to find support going forward.

First support zone should come in around $304 as defined on the chart above. That level is the 2011 bull market high and would about double the amount of the most common correction size (40 pts). The next likely support area would come in around the $260-$270 level. There we have a prior swing high, the 38.2% retracement of the bull market starting in 2011, and would double the size of the biggest correction so far (50 pts).

Netflix has been the best performer in the S+P 500 and has had a remarkable run in the last two years. And this doesn't mean the party is over, however using some caution here would certainly be prudent in my opinion.