Netflix Stock May Be Flashing a 'Buy'

Netflix earnings could serve as another positive catalyst for the shares

Apr 7, 2017 at 1:51 PM
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Streaming content stock Netflix, Inc. (NASDAQ:NFLX) has been hot, and could be headed even higher. Even as options traders have shown a distinct preference for puts over calls, the shares have just come off an all-time peak of $148.29, notched on March 30. Moreover, according to data from Schaeffer's Quantitative Analyst Chris Prybal, support at the ascending 40-day moving average could spring NFLX stock to its next technical milestone.

Based on Prybal's chart below, Netflix shares have touched the 40-day trendline 66 times, after restricting the data to a maximum of one signal per 30 trading days. Two weeks after those occurrences, the stock has averaged a gain of 1.4% -- and things look progressively more bullish the further out you go. By the 63-session time frame (or three months), NFLX boasts an average post-signal return of 12.4%, with 63% positive. And by 252 trading days (one year), the shares have gone on to a typical advance of 76%, with 70% positive. Long story short, the 40-day has served as a reliable "buy" signal in the past.

netflix stock returns after 40 day trendline signal

Yet, NFLX's Schaeffer's put/call open interest ratio (SOIR) is 1.34, in the put-skewed 99th percentile of its annual range. Moreover, the SOIR is at its highest point since early 2016.

netflix stock options open interest

The extreme bias toward puts over calls is echoed by buy-to-open data on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Specifically, NFLX's 10-day put/call volume ratio of 1.05 checks in above 91% of all other readings taken in the past 12 months. While a portion of these put buyers may be shareholders hedging against downside risk, a capitulation among "vanilla" bears could create more tailwinds for the outperformer -- already up 38% year-over-year at $143.53.

Digging deeper, options-related support at key strikes could come into play in the months ahead. Looking at options expiring in the front three-months' series, peak open interest among all strikes resides at the underfoot 140 put -- totaling north of 27,000 contracts -- which could prove a foothold.

Separately, NFLX stock could benefit from an unwinding of bearish holdouts on Wall Street. For one, 12 analysts still rate the shares a "hold" or a "strong sell." For another, 23 million shares remain dedicated to short interest, which translates into a week's worth of pent-up buying activity, at NFLX's average trading rate.

One final catalyst on the near-term horizon is Netflix earnings, due after the close on Monday, April 17. Historically, the stock has been mixed in the session subsequent to previous reports. However, following the last two earnings releases in January and October, NFLX shares jumped 3.9% and 19%, respectively.

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