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Should You “Subscribe” to the Horror Film Unfolding in Netflix Stock?

Chris Tyler

It’s not a “house of cards”, but technically Netflix (NASDAQ:NFLX) stock is looking scary on the price chart. And in the short term, that spells opportunity for bears shorting Netflix stock.

Let me explain.

If the market is getting you spooked these days, you’re not alone. From earnings worries, Saudi-based geopolitical theater, Italian debt concerns or China-U.S. trade war fears, there’s a lot to spook investors. And in an already skittish market, Netflix stock’s latest tapping of the debt market is proving downright scary on the price chart.

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Coming off strong Q3 results this past week, Netflix, the world’s largest streaming video on demand operator announced on Monday it’s taking on an additional $2 billion in debt following last year’s $1.9 billion and existing obligations of nearly $12 billion.

With continued competition from Amazon (NASDAQ:AMZN), Disney (NYSE:DIS), AT&T (NYSE:T), Hulu and others, NFLX is expecting to spend a whopping $8 billion this year on its original programming content in order to maintain and distance itself from its rivals as the undisputed player in the SVOD market.

Thus far, the bet and the growing pile of debt to service it has, has worked incredibly well for NFLX stock. Since 2013, when the company’s first foray into original content with House of Cards was introduced, NFLX has seen its subscriber base rocket by nearly 100 million … including 7 million this past quarter.

Netflix Stock Weekly Chart

Netflix Stock Weekly Chart

However, as Netflix stock’s weekly price chart strongly suggests, in a market environment that’s spooked or on edge, investors are less receptive to NFLX’s aggressive business strategy. As of Monday, shares broke narrowly below 200-day simple moving average support. It’s strongly anticipated the failure sets up a quick move to the August low near $311. However, I don’t see the challenge as holding and Netflix stock should be heading even lower.

Personally, I don’t think NFLX stock is a house of cards from a technical standpoint. Still, healthier corrections in a volatile name like NFLX stock, which often total 30% or even greater in less-friendly market environments, means NFLX still has a ways to go.

In fact, in order to be picture perfect Netflix stock would need to test $296. Furthermore, following a couple years of outsized gains, stochastics oversold but they are not yet an ally for bulls. The 38% retracement level at $292 — a corrective lower low — can be expected to develop before an eventual bottom will form.

For traders that agree with this bearish short-term outlook for Netflix stock, using a two-day trailing stop on a short stock position sets the initial risk at just under 5% with shares near $320.

Based on our downside objective, the minimum payoff works out to roughly twice the initial risk of the position. But another spook in NFLX and using a trailing stop could quickly improve this bear’s risk-to-reward framework in a jiffy, and support the argument for putting Netflix stock on your radar for shorting.

Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies and related musings, follow Chris on Twitter @Options_CAT and StockTwits.

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