Netflix stock is rallying on better-than-feared earnings. The chart hints at how they could extend that move.
If simply not going down is a big win for the bulls, it shows how dire the circumstance had become.
Netflix kicked off earnings for the FAANG stocks by reporting its quarterly results on Tuesday after the close. Earnings beat expectations, while revenue grew 8.6% year over year but missed consensus estimates.
Perhaps the most important metric came in better than feared: Netflix lost 970,000 subscribers instead of losing 2 million subscribers, to which the company had guided last quarter.
These measures, along with guidance that came up short of expectations and a disappointing look at margins once you parse through the numbers, are not all that encouraging.
But after a 77% peak-to-trough decline from an all-time high we hit just eight months ago, the stock could be expected to eventually rally on news of this sort.
At some point, we must also realize that Netflix has become more of a value stock than a growth stock. It still trades at around 18 times earnings.
Trading Netflix Stock After Earnings
Daily chart of Netflix stock.
Chart courtesy of TrendSpider.com
Now that the stock is indeed rallying on better-than-feared news, investors wonder whether this could be Netflix’s moment to churn higher.
On Monday and Tuesday, Netflix stock rallied to the 10-week moving average, giving it its first test since April. While this measure was resistance earlier this week, Netflix was able to gap above it on Wednesday following its earnings results.
Just above the 10-week is the June high, at $207.38. Closing above this level is important, in my opinion. It keeps the stock in a monthly-up rotation and above the 10-week moving average.
That’s important because as of now we’re not really seeing a robust earnings reaction. In that sense, Netflix stock still remains vulnerable.
If the stock were to go below the June high, the bulls would need to keep this stock above $200. Below $200 puts the backside of prior downtrend resistance in play (blue line), followed by the 21-day and 50-day moving averages.
Above $207.50 and perhaps Netflix can gain more momentum. Above $216 — and alongside a potential broad market rally — could open the door to the $245 to $250 area.
That zone is about 20% above the June high and would bring Netflix to the gap-down high, as well as the 50% retracement as measured from the 52-week low up to the gap-fill level near $333.
The bulls need to keep in mind that the long-term trend is still bearish, while the short-term trend is improving.
The bears need to keep in mind that Netflix stock was trading at $700 in November and in the $160s for the past three months.
So the shares could double (causing a lot of pain for short-sellers) while still being in a bearish technical setup.