Netflix, Inc. (NFLX) missed quarterly earnings estimates after the closing bell on April 21. The stock declined toward its quarterly pivot at $393.38 and then popped higher again. The stock is thus consolidating above this level and its all-time intraday high of $449.52 set on April 16.
The streaming video giant knows that content is king. And Netflix spends a fortune to stay on top. Global subscribers are on the rise as households around the world are on lockdown due to COVID-19. The stock is not cheap, as its P/E ratio is elevated at 88.37 without offering a dividend, according to Macrotrends.
Netflix stock closed last week at $435.55, up 34.6% year to date and in bull market territory at 50.1% above its March 17 low of $290.25. The stock is just 3.1% below its all-time intraday high of $449.52 set on April 16. The earnings miss from Netflix ended a winning streak of eight consecutive quarters in which it had beaten estimates.
The daily chart for Netflix
The daily chart for Netflix shows that the stock traded on both sides of its 200-day simple moving average before breaking out to the upside on April 13 as a setup that favored a positive reaction to earnings released on April 21. 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 $323.18 on March 13 proved to be a buying opportunity. This led to the all-time high of $449.52 set on April 16. Since this high, the stock has held its quarterly pivot at $393.38 on weakness.
The weekly chart for Netflix
The weekly chart for Netflix is positive, with the stock above its five-week modified moving average of $397.50. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $259.90.
The 12 x 3 x 3 weekly slow stochastic reading ended last week rising to 78.79, up from 75.80 on May 1. This reading will likely be overbought this week with a reading above 80.00 on a scale of 00.00 to 100.00. Note that, at the September 2019 low, the stochastic reading was 9.63, below the 10.00 threshold, which defines a stock that is technically "too cheap to ignore."
Trading strategy: Buy Netflix shares on weakness to the monthly, quarterly, semiannual, and annual value levels at $400.16, $393.38, $381.22, and $314.45.
How to use my value levels and risky levels: The closing prices on Dec. 31, 2019, were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.
The second quarter 2020 level was established based upon the March 31 close, and the monthly level for May was established based upon the April 30 close. New weekly levels are calculated after the end of each week, and new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, while annual levels remain in play all year long.
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.