(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NFLX.)

Netflix Inc.'s (NFLX) stock could be sending warning signals, with a stock that was hammered the past week ending December 1. Shares finished the week lower by nearly 4.5%, while the broader S&P 500 rose by roughly 1.5%. The stock received a big vote of support on Friday when JP Morgan named Netflix their top growth pick going into 2018, according to a report. The analyst, Doug Anmuth, rates the streaming media company with an outperform rating and price target of $242 on the stock, nearly 30% higher than the current price around $186.75. 

The vote of confidence didn't help to boost shares of Netflix at all, which finished Friday lower by nearly 40 bps. But the more significant concern could come from what the trading patterns are saying about the stock. It suggests that shares of the stock could be headed lower going into the final weeks of the year, perhaps by nearly 10%. 

It was recently noted in an Investopedia article that the options market was looking for the stock to rise to nearly $230 by April, an increase of almost 23% from its current price. A crack in that bull case scenario appeared this week when shares got hammered on November 29, falling by nearly 7.5% in one day and failing to recover those losses by the close on Friday. (For more, see also: Netflix Stock May Rebound 17%, Options Trades Indicate.)

 

NFLX Price Chart

NFLX Price data by YCharts

Netflix's price fell below what had been a very solid support level around $190 on Wednesday. In fact, the stock tried on multiple occasions over the rest of the week to regain that support level but was hit by a big wall of sellers. 

 

 

 

When the price cracked support, it came on a massive surge in volume, which indicates there were plenty of traders and investors heading for the exit. However, shares were unable to get the same levels of enthusiasm when the stock tried to rise above $190 on multiple attempts. It shows that JP Morgan's positive outlook on the stock on Friday failed to mount the support to advance through the new resistance level, again being met by sellers. (For more, see also: Analyzing Netflix's Threat of Substitutes.)

 

 

 

It could be a warning sign that the stock has further room between now and year-end to decline towards the bottom of the trading channel around $170. A decline to $170 would be a healthy correction in the stock, should it happen. The uptrend would remain intact at $170, meaning the long-term bull case scenario is still in place. 

Watch how Netflix shares trade early this week. If the stock can't get back above $190 and continue to rise, it is a sign that shares have more room to fall. 

 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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