Netflix Stock Drop Could Be a Buying Opportunity

Netflix shares are flirting with correction territory

Jun 12, 2017 at 1:42 PM
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FANG stocks are getting drilled for a second straight day, as big-cap tech stocks tumble with Apple shares. In the original "FANG" group is Netflix, Inc. (NASDAQ:NFLX), the shares of which were last seen 4.4% lower at $151.08. At today's intraday low of $148.31, NFLX stock was down more than 11% since its record peak of $166.87 on Thursday, June 8 -- on pace for "correction" territory (considered a close-to-close drop of 10% or more from a notable peak). However, if recent history is any indicator, the recent Netflix dip could mark a buying opportunity.

NFLX Stock Set to Breach Notable Moving Average

Netflix stock is on pace to end beneath its 50-day moving average for the first time since April 21, which in retrospect marked an opportune time to scoop up NFLX shares. After that signal, NFLX stock went on to rally nearly 17% over the next several weeks, culminating in an all-time high of $166.87 on Thursday, June 8. Prior to that, you'd have to go back to late September to find a Netflix stock close beneath its 50-day trendline. Had speculators bought NFLX shares at that point, and held them until the aforementioned April pullback, they would've gained more than 50% on their investment in about six months.

netflix stock chart nflx

Going back to 2010, NFLX stock has ended beneath its 50-day moving average 18 times, after at least a one-month run atop this trendline, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. One week after these signals, NFLX stock was up 1.76%, on average -- much better than the shares' average anytime one-week return of 1.17%, going back to 2010. 

Likewise, two weeks after a signal, Netflix stock was up 3.12%, on average, with a win rate of 61.1%. Again, that's better than the stock's anytime two-week return of 2.35%, with 59.6% positive. A month after these signals, NFLX stock's win rate is a weaker-than-usual 55.6%, but the shares were higher by 6.14%, on average, compared to an anytime one-month gain of 5.03%.

nflx buy signal

Wall Street Has Been Wary of NFLX Stock

Meanwhile, NFLX sports a Schaeffer's put/call open interest ratio (SOIR) of 1.21, indicating puts outnumber calls among options expiring in the next three months. This ratio sits higher than 81% of all others from the past year, suggesting near-term Netflix options traders are more put-biased than usual. The June 150 put is home to peak open interest in the front-month series, which could translate into an added layer of options-related support this week.

Plus, should Netflix shares once again take off, a short squeeze could add fuel to the stock's fire. Short interest accounts for nearly 27.5 million NFLX shares, representing more than a week's worth of pent-up buying demand, at the stock's average pace of trading.

There's also plenty of room aboard the bullish bandwagon, as far as analysts go. Despite NFLX stock's stellar long-term uptrend, 11 out of 29 analysts maintain tepid "hold" or "strong sell" ratings on the stock. Should Netflix shares resume their quest for all-time highs, a round of upgrades could lure even more buyers to the table.


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