Netflix, Inc. (NFLX) missed quarterly earnings estimates after the closing bell on Thursday, July 16. The stock gapped below its semiannual pivot at $514.13 at today's open and tested its monthly value level at $485.37.

The streaming video giant knows that content is king. Netflix spends a fortune to stay on top. The number of global subscribers rose during the COVID-19 lockdown, but the outlook for future subscribers disappointed Wall Street analysts.

Netflix shares closed Thursday, July 16, at $527.39, up 63% year to date and in bull market territory at 81.7% above the March 17 low of $290.25. The stock was down 8.3% from its all-time intraday high of $575.37 set on March 13. Netflix stock is not cheap, as its P/E ratio is elevated at 105.92 without offering a dividend, according to Macrotrends.

The daily chart for Netflix

Daily chart showing the share price performance of Netflix, Inc. (NFLX)
Refinitiv XENITH

The daily chart for Netflix shows that the stock has been above a golden cross since Jan. 31, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices would follow. The test of the 200-day simple moving average at $323.34 on March 12 proved to be a buying opportunity, which led to the all-time high intraday high of $575.37 set on July 13. On March 12, Netflix was also testing its annual value level at $314.95, strengthening the buying opportunity.

Following the V-shaped bottom, the stock tracked its 50-day simple moving average higher from March 23 to June 29. The semiannual risky level at $514.13 was first tested on July 10. The stock stretched to its all-time of $575.37 on July 13, and the $514.13 pivot was a magnet between July 14 and July 16. The gap lower on July 17 on the negative reaction to earnings was followed by a test of the monthly value level at $485.37 during the trading day.

The weekly chart for Netflix

Weekly chart showing the share price performance of Netflix, Inc. (NFLX)
Refinitiv XENITH

The weekly chart for Netflix is positive but overbought, with the stock above its five-week modified moving average of $465.74. The stock is well above its 200-week simple moving average, or reversion to the mean, at $277.89.

The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 81.25, above the overbought threshold of 80.00. At the September 2019 low, the stochastic reading was 9.63, below the 10.00 threshold, which defined the stock as being technically too cheap to ignore.

Trading strategy: Buy Netflix stock on weakness to the monthly value level at $485.37 and reduce holdings on strength to the semiannual pivot at $514.13.

How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. The annual levels remain on the charts. The monthly level for July was based upon the last nine monthly closes, the third quarter level was based upon the last nine quarterly closes, and the second half 2020 level was based upon the last nine mid-year closes. New weekly levels are calculated after the end of each week.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.