Streaming video giant Netflix, Inc. (NFLX) had a volatile ride this week as shares gapped higher on Tuesday after the company announced that it was raising its monthly subscription price to $13 on its 58 million U.S. subscriber base as costs rise. The stock – which closed at $332.94 on Monday, gapped with an open of $349.60 on Tuesday and then traded as high as $358.85 on Wednesday – was set for a positive reaction to earnings after the close on Thursday. The 4:00 p.m. close for Netflix stock on Thursday was $353.19.
We know how volatile Netflix can be in reaction to earnings, but most on Wall Street expected that the sky was the limit. The stock reported better-than-expected subscriber growth and earnings per share results but missed expectations on revenue and lowered its outlook for the first quarter.
The Netflix bulls forgot that the company would be spending a king's ransom for content this year to stay ahead of new streaming competition from Amazon.com, Inc. (AMZN), The Walt Disney Company (DIS) and AT&T Inc. (T). It was not a surprise that Netflix will burn through $3 billion in 2019 for content.
Investors who believe in the longer-term story for Netflix had a chance to buy the stock on weakness in after-hours trading on Thursday. Going into earnings, Netflix stock closed Thursday, Jan. 17, at $353.19, up a staggering 32% so far in 2019. The stock was also 52.7% above its Dec. 26 low of $231.23. The stock was still in correction territory at 16.5% below its June 21, 2018, high of $423.20.
The daily chart for Netflix
This daily chart for Netflix will not show the after-hours trades, but we see that the stock gapped above its 200-day simple moving average at $334.10 and above the horizontal line that represents my monthly pivot at $342.10. In after-hours trading following the earnings report, Netflix shares traded as low as $333.38, which gave investors the opportunity to buy the stock at its 200-day simple moving average at $334.10. If you are bullish on Netflix, consider the level between $327.12 to $342.10 as your buy zone. These two horizontal lines are my semiannual and monthly pivots.
The weekly chart for Netflix
The weekly chart for Netflix will remain positive if the stock ends the week above its five-week modified moving average of $304.13, which seems highly likely. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $177.96. The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 45.28 this week, up from 28.43 on Jan. 11. When the stock was trading at its all-time high of $423.20 on June 21, the stochastic reading was above 90.00, indicating that the stock was in an "inflating parabolic bubble," which proved to be an accurate technical warning.
The horizontal lines are the Fibonacci retracement levels of the bull market run from $79.95 in February 2016 to the high of $423.20 set on June 21, 2018. The stock closed Thursday, Jan. 17, above its 23.6% retracement at $342.32 and then traded back and forth around this key level in after-hours post-earnings trading. Consider the 38.2% retracement level as major support at $292.22.
Trading Strategy: Given these charts and analysis, investors should buy the stock if it trades between my semiannual pivot at $327.12 and my monthly pivot at $342.10. This range includes the 200-day simple moving average at $334.10 and the 23.6% retracement at $342.32 lining up with my monthly pivot at $342.10. If these key levels hold, the upside in the first quarter is to my quarterly risky level at $379.92, where positions should be reduced.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.