Amid the lingering Omicron scare, shares of Netflix (NASDAQ:) were sucked into a broad sell-off of growth stocks. NFLX lost 12.5% ??of its value even after a two-day rebound.
Due to the sell-off, the streaming giant's share is now hitting its worst monthly performance since September 2019. It is now also lagging behind among FAANG peers.
That surprises us. The depreciation of shares issued by a company primarily engaged in consuming content from home as fears of renewed lockdown loom are contradictory
.
We would therefore be inclined to attribute the losses to profit taking. On the other hand, as of Friday, the stock is down nearly 15%. That seems to be about more than just profit taking.
Yet traders saw a 42.6% gain between May 12 and November 18. Not too bad to keep in stock for six months. In comparison, among the FAANGs, 27.1% of the shareholders of Meta Platforms aka Facebook (NASDAQ:) were in that period, between the same launch date and September 1. Now FB is only +11.2% higher. Amazon (NASDAQ:) is now just 5.7% higher than it was on May 12.
Only Alphabet (NASDAQ:) and Apple (NASDAQ:) have won as much or more than Netflix in the same period.
Analysts are also optimistic about the company for fundamental and technical reasons, but we remain cautious. In our opinion, based on the technical chart, the stock is about to plunge even further.
There is an assumed support of $575, a resistance line since July that was broken in August and confirmed in September, just as the analyst in the link above claims. We agree.
In our estimate, however, the stock represents a descending H&S peak. This pattern is so weak it can't even make a good right shoulder.
While that does indeed sound bearish, the added drawback is that it is challenging to know when the pattern is complete as it falls. What makes it more difficult when the price is on the decline is to know if it will stay within the pattern or if it may disappear.
Note that the price peaked with each fall and dried up with each rise, indicating where the participation lies.
The price cut sharply through the 50 DMA and then went below the 100 DMA. The price found resistance at the time and pulled back after touching it on Tuesday, even during a rally.
Below that, at $575, is our assumed support line.
So how can a trader know when the pattern is complete if it relies on violating a price neckline that continues to fall? In our estimation, the assumed $575 support will likely be the decisive technical milestone to mark a top.
The 200 DMA also did it and underlined the importance of this price level. 200 DMA, then get up and find resistance.
Moderate traders would be satisfied with a support penetration of $575.
Aggressive traders can now go short, provided they accept the higher risk of moving ahead of everyone else for those higher profits. Money management is crucial. Here's an example showing the key points of a coherent plan:
Trade example
Input: $605
Stop Loss: $610
Risk: $5
Goal: $575
Reward: $30
Risk Reward Ratio: 1:5
