Netflix Is a Hot Potato

 | Aug 19, 2013 | 8:30 AM EDT  | Comments
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They say, "What goes up, must come down," but some securities seem to defy gravity. Netflix (NFLX) is one of them.

I admit that, at one point, I didn't have much faith in this subscription-media company. At that time, the firm had relied almost entirely on its direct-mailing of DVD movies and games. I lumped it into the same category as that of the late Blockbuster, which has since sunk into oblivion, trading at less than a penny a share as BB Liquidating.

As Netflix moved into the realm of streaming its content online, and then virtually cornered the market several years ago, its shares soared. But it was only a matter of time before others would attempt to steal the show.

At first, competition from Hulu and Amazon's (AMZN) Prime service failed to draw much business away from the company. While Amazon Prime's viewing library is relatively similar to that of Netflix, it still has yet to catch to up on user-friendliness. Nevertheless, the company does offer free shipping offer for its Prime customers -- and, for many, this can often be worth the price of the membership by itself. Hulu was another upstart, but once it rolled out its subscription services under Hulu Plus, it quickly garnered attention by offering new releases that were difficult to impossible to find elsewhere (legally, at least).

Five years ago Netflix stock was trading at $30. It peaked in 2011 at $304.79. Then the company began to roll out new changes -- and when you are dealing with a company that has already soared, and whose shareholders are very happy, change is not good. Heading into the fall, the company reported substantial losses in its subscription base. The losses roughly corresponded to a 60% hike in the cost of its subscription services. The downfall was devastating to shareholders and, almost exactly one year ago, shares of Netflix fell to a low of $52.81.

Over the last year, however, Netflix has been "the comeback kid." In fact, the company made history last month by becoming the first streaming-media service to earn a coveted Emmy nomination for original content. The stock traded as highs at $270.31 in the past six weeks as the market finally embraced the decisions made by the company's founder and CEO, Reed Hastings -- who, in the eyes of the ever-critical public, had also made a comeback.

Now, however, those eyes are once again scrutinizing Netfix closely. Yes, the company beat earnings estimates this season by $0.09 per share, having reported a per-share profit of $0.49. Its subscription projections fell right in the middle of expectations, as well. But its third-quarter outlook was disappointing.

This is where we turn to the technical side of Netflix's share price.

Netflix (NFLX) -- Daily

Netflix stock ended Friday's session at $258.87 after a sharp fall for several days last month, which had corresponded to second-quarter earnings. Since then the stock has inched higher, hanging onto support levels for longer than one would typically expect, given the rapid continuation of last month's reversal attempt. But it has failed to gain enough support to recover those losses.

Netflix (NFLX) -- Weekly

If we step back and look at the larger time frame, we see that resistance from the 2001 looms overhead. The rapid retreat, and nearly as-rapid recovery, will strengthen that resistance level. Despite strong surges of buying throughout the past year, the extent of those bull runs has diminished with each new break to a new 52-week high. This has resulted in a shift in the uptrend's momentum on the weekly and monthly time frame as Netflix approaches those prior highs.

I don't anticipate the sort of panic-driven Netflix selloff that we saw in 2011, but I am cautious on the near-term outlook. To me, this stock is not an investment opportunity right now. But, despite the recent decline in volume, it will remain a favorite for short-term traders for some time. We will likely continue to see strong multi-day to multi-week swings, and it still remains quite possible that Netflix will push even further into those prior highs before any major price correction takes place.

In the meantime, in the months ahead I anticipate short-term corrections similar to the one that took place last quarter, with more of a focus on correcting over time than through price. This should continue to work well for swing traders, but I would caution against looking to hold on to this one for more than a few weeks.

As we kick off the new week, I'm bullish intraday on Netflix, but from a very short-term stance. In particular, I'm focusing on intraday trades. I'm watching for a retest of prior highs, and preferably even a slightly higher high on the daily time frame, to create a bull trap. This would allow for another rapid, multi-day drop within the next week or so -- which, in turn, would change my stance from a day trading perspective to a swing-trading one.

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