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Go Short Netflix, Inc. (NFLX) Stock Before It Dives

Various market performance charts

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After an epic 50% rally of the late September lows at $95, shares of Netflix, Inc. (NASDAQ: NFLX ) appear to have stalled out. Major overhead resistance now looms, and I expect NFLX stock to pull back and enter a consolidation phase in coming weeks.

There is no disputing the strength of the recent rally, with the last leg likely fueled by short covering. Short interest has fallen substantially over the past months as Netflix stock continued to head higher and higher.

Now that the shorts have been taken out, however, the fuel for a further rally must come more from a fundamental basis. A market cap exceeding $60 billion and a price-to-earnings ratio of more than 300 on NFLX will make that much less likely to justify at current levels.

Due to the insane fundamental valuation metrics, NFLX stock has always traded more on technical merits. From a technical standpoint, Netflix shares are definitely looking toppy. The $145 level is now a critical resistance level.

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More importantly, the uptrend line has been broken in Netflix, and shares now may be putting in a double top at the $142.50 area.

A further down-leg in NFLX will serve to confirm the end to the trend.

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Netflix also recently generated a MACD sell signal, which has proven to be a reliable indicator of short-term tops in the past. MACD is a momentum indicator and validates the idea that Netflix stock is losing momentum and is poised for a pullback.

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Implied volatility (IV) is also showing some bearish signs. Current IV levels are at only the 6% percentile, indicating a high degree of complacency. This is normally a solid contrarian indicator and signals that euphoria may have run its course.

In my previous post on Netflix , I talked about some of the hurdles facing Netflix, which are still valid. In a similar fashion to then, I expect a short-term pullback in NFLX shares. With IV at such low levels, long volatility strategies are warranted.

How to Trade NFLX Stock Here

Buy the March $140 puts and sell the 24 Feb $137 puts for a $2.60 net debit

Maximum risk on the trade is $260 per spread. Ideally, NFLX stock closes near $137 on Feb. 24 expiration.

I would use a meaningful breakout to new highs past the $145 level as a stop.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.

The post Go Short Netflix, Inc. (NFLX) Stock Before It Dives appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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