Tough Year Ahead for Netflix Shareholders

Netflix, Inc. (NFLX) has to prove that it can prosper in the expanding streaming war after Dow components The Walt Disney Company (DIS) and Apple Inc. (AAPL) fired up new services in the fourth quarter. Nervous Netflix shareholders hope that Tuesday's post-market earnings release takes a giant leap in that direction, with Wall Street analysts now expecting earnings per share (EPS) of $0.53 on fourth quarter revenues of $5.45 billion.

The stock sold off after the streaming giant missed third quarter subscriber estimates in October, adding to downside that started with a 37-point one-day decline after second quarter metrics came up short by a wide margin in July. Comcast Corporation's (CMCSA) NBCUniversal and AT&T Inc.'s (T) HBO will also fire up new offerings this year, adding to a highly competitive landscape that will eventually declare new sets of winners and losers.

There's little doubt that Netflix can find a comfortable niche within this growing competition, but its torrid growth rate may have topped out in 2019, and the stock can no longer sustain the still-lofty price-to-earnings (P/E) ratio of 109. Another 6 to 12 months of lower prices may be needed to bring this high valuation in line with performance, adding considerable risk for sidelined investors looking to take the plunge and jump back into long positions.

Making matters worse, Netflix stock has been gaining ground since bottoming out in September, but the oversold bounce is now approaching resistance that could easily trigger a reversal. That is a big deal because the four-month uptick has carved the outline of a bear flag pattern, most often seen in active downtrends. As a result, we can't assume that the next selling wave will hold support now located near $270, or about 70 points lower than this morning's opening tick.

NFLX Long-Term Chart (2009 – 2020)

Chart showing the share price performance of Netflix, Inc. (NFLX)

A 2009 breakout over five-year resistance at a split-adjusted $5.68 caught fire, yielding a momentum-fueled uptrend that topped out in the mid-$40s in 2011. It sold off more than 80% in the next year, finding support on top of the breakout level in the third quarter of 2012. The subsequent recovery wave completed a round trip into the prior high in 2013, yielding a breakout that attracted little upside until committed buyers opened positions in 2015.

That rally ended near $130 in August 2015, giving way to an orderly correction, followed by a breakout in the second quarter of 2017. The stock tripled in price into June 2018's all-time high at $423 and sold off once again, finding support at $231 at year end. A 2019 bounce reversed at the .786 Fibonacci sell-off retracement level, while a decline into September ended above the prior low. Taken together, it appears that price action is carving a large-scale symmetrical triangle pattern.

NFLX Short-Term Outlook

The monthly stochastics oscillator entered a buy cycle from the oversold level in March 2019, predicting at least six to nine months of relative strength. The indicator still hasn't reached the oversold zone, raising the odds that the current bounce can reach triangle resistance now located above $360. That target makes sense because the July sell-off left behind an unfilled gap between $330 and $362 that might get filled in reaction to this week's confessional.

Market technicians expect the symmetrical triangle to carve five waves higher and lower before ejecting into a breakout or breakdown. The advance into January 2020 marks the fourth wave, while a reversal between the $340s and $360s could signal a fifth and final wave. This pattern-building process could last into the second half of 2020, predicting that the stock will remain range bound while investors find out how well Netflix is competing with the Dow's heavyweights.

The Bottom Lone

Netflix stock is caught in a massive trading range that's unlikely to budge until the escalating steaming war generates market-moving subscriber trends.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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