Buying into big growth stocks like Netflix (NFLX) can be a rewarding investment for traders who are looking long term. The momentum these stocks gather as they climb higher becomes every investor’s dream. Too often though investors are burned when their impressive gains quickly fade away in the aftermath crash.
Performing technical analysis can help to identify how and why momentum stocks fly and die. Investor psychology causes major price movements and technical analysis is just one way to translate these movements into legitimate buy and sell signals (see How Momentum Stocks Fly then Die – Part 1).
From March 2009 till July 2011 Netflix rose from $35 to a peak of $304.79 (+770%). Since peaking in July, Netflix has slumped all the way down to nearly $100 per share and currently trades at around $111 (-64%). The company split their primary service offerings into two and increased pricing across the board. This and a new brand name Qwikster – which was later scrapped – spurred the majority of the sell off from the stock’s top.
Netflix 2005 to 2009
This four year weekly chart gives a good look at how long Netflix took to start its huge move up. Note the base on base setup (blue, purple) and the follow up buy point presented (orange).
Netflix 2009 to 2011
After Netflix broke out there were several quality followup buy opportunities for investors. In fact, Netflix was originally mentioned as a buy on this blog way back in February 2010 at $62 a share off a post earnings bull flag.
The rising channel breakdown (purple) is clearly identified with the weekly chart and when Netflix lost this support it was more or less the beginning of the end for the stock.
Netflix Breakdown 2011
A daily view of the top and subsequent fall off by Netflix reveals the stock lost its momentum and key trending support before it really began to collapse. Highlighted below is the long term trendline support alongside the 50 and 200 day moving averages. Note also the consistent lower lows made by the stock heading into the heavy volume gap down session on 9/15/11.
Investors that use stop loss orders or that learn to identify these signs can learn to lock in profits early and avoid the aftermath of stocks like Netflix.
Looking ahead, Netflix is still a great company. They recently decided to scrap the whole Qwikster brand concept in favor of sticking with the Netflix name for its direct-to-home movie and game offering. Although both the streaming service and direct to home service run separately at a $7.99 price point per month, Netflix still boasts tens of millions of subscribers with little competition.
Netflix reports its next earnings Monday October 24th after the bell and considering the stock is so badly beaten down, if it can report decent numbers then the stock has a good chance at seeing a rebound gap. Where the stock goes from there however is anyone’s guess.
*UPDATE 10/25/11: Netflix opened at about $75 per share (-36%). Ouch!
*UPDATE 10/24/11: Netflix posted “dismal subscriber numbers”, missed earnings + guidance, and is trading down over 20% after hours as a result. The stock is currently trading under $95 per share.