Quarterly Shocker Could Signal Netflix Top

Netflix, Inc. (NFLX) shares fell more than 13% in Wednesday's post-market after the streaming giant missing U.S. and international subscriber estimates. The company blamed weak second quarter programming for the shortfall, but it raised rates during the period, indicating that there's a limit to the price that customers will pay for streaming entertainment. International political tensions also contributed to the disastrous quarter, with the American band losing its luster in many parts of the world.

CEO Reed Hastings and company are entering a dangerous period, with major competition set to come online in the fourth quarter. Dow components Apple Inc. (AAPL) and The Walt Disney Company (DIS) will fire up their own streaming services at that time, while AT&T Inc. (T) and Comcast Corporation (CMCSA) will follow suit in 2020. Disney will be an especially dangerous rival, removing a treasure trove of blockbuster content from the Netflix site.

Netflix stock hasn't posted a new high in the past 13 months, the longest losing streak in more than five years. The 2019 uptick missed the mark by nearly 50 points when it ended at $386 in May, while the ferocious post-earnings reaction has settled at a six-month low. Unfortunately, additional selling pressure and lower prices are likely in the coming weeks as shareholders consider the fallout of competitive pressures and resistance to price hikes.

NFLX Long-Term Chart (2002 – 2019)

The former DVD mail order company came public at a split-adjusted $1.16 in May 2002, entering an immediate downtrend that posted an all-time low at 35 cents in October. It mounted the post-IPO price in 2003 and took off in a strong uptrend that topped at $5.68 in February 2004. That marked the highest high for the next four years, ahead of narrow sideways action with support near $2.50. The stock held that level during the 2008 economic collapse, setting the stage for a 2009 breakout that dovetailed with the rapid build-out of high-speed and wireless internet.

The decline after the 2011 high at $43.54 carved the most bearish action in the stock's public history, dumping into the single digits in 2012 before completing a round trip one year later. A breakout failed to attract buyers, testing new support for nearly two years before ejecting higher in a stair-step uptrend that accelerated in the first quarter of 2018. The rally ended at an all-time high near $425 in June, giving way to a double top pattern that broke to the downside in October.

The sell-off found support at an 11-month low in December, while the 2019 bounce stalled at the .786 Fibonacci sell-off retracement level. Sideways action into July ended last night with a breakdown through five-month range support at $335. Adding to technical headwinds, the monthly stochastics oscillator crossed into a sell cycle in May, predicting relative weakness that could persist through the fourth quarter. Even so, the stock has been range bound for the past 18 months and is likely to hold those boundaries into year end.

NFLX Short-Term Chart (2016 – 2019)

The on-balance volume (OBV) accumulation-distribution indicator ended a multi-year accumulation phase in June 2015, six months prior to the price peak, while the subsequent distribution phase ended in January 2016. OBV reached the prior high in 2018 and broke out, but buying interest then vanished, yielding a narrow sideways pattern that is crisscrossing the breakout level. This holding period could now come to an end, setting off an aggressive distribution phase.

The Fibonacci sell-off grid highlights hidden support and resistance within the 192-point trading range, with today's breakdown through the 200-day exponential moving average (EMA) at the .618 retracement also cutting through the .50 retracement at $327. The stock could settle around that harmonic level heading into the weekend, but an eventual trip into the .382 level appears likely because that downdraft would also test psychological support at $300.

The Bottom Line

Netflix may have undergone a bearish paradigm shift in the second quarter, failing to meet domestic and subscriber estimates by a wide margin. 

Disclosure: The author held no position in the aforementioned securities at the time of publication.