Buy the Netflix Stock Chill

A negative earnings reaction for FAANG stock NFLX could be a bullish signal

Jul 18, 2018 at 2:33 PM
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FAANG stock Netflix, Inc. (NASDAQ:NFLX) was the talk of Wall Street on Tuesday, after the streaming content titan reported weaker-than-expected subscriber growth in the second quarter -- much to the delight of several analysts who had issued pre-earnings downgrades. Although NFLX was well off its session lows by yesterday's close, the security still surrendered more than 5% on the day. However, a technical signal suggests now could be an opportune time to snag Netflix shares at a discount.

NFLX yesterday fell as low as $344, and was on track for its worst day since 2016, but ultimately settled at $379.48. Today, the FAANG stock is down another 1.4%, last seen at $374.12.

However, the security is now within one standard deviation of its 80-day moving average, after a lengthy stretch above this trendline. Historically, similar pullbacks to this trendline have presented buying opportunities. After the last six signals, Netflix stock went on to rally 5.18%, on average, one month later, and was higher 83% of the time, per data from Schaeffer's Senior Quantitative Analyst Rocky White. A similar rebound from current levels would put NFLX around $393.50.

NFLX stock chart july 18

In addition, it's worth noting that the last time NFLX stock fell after earnings was in mid-October. The equity retreated 1.6% the day of its miss, and went on a five-day losing streak. By Nov. 6, the equity was back within striking distance of its pre-earnings highs. Likewise, Netflix shares surrendered 2.6% on April 18, 2017, after an earnings whiff, ending at $143.36. By May 12, NFLX closed back above $160.

Options volume yesterday touched a new annual high, with about 457,000 puts and 536,000 calls exchanged. Volume remains accelerated today, trading at 1.6 times the norm. It looks like some short-term speculators are expecting NFLX to rebound back above $380 by week's end, buying to open the July 380 call -- the most active option so far today.

Traders looking to speculate on the FAANG stock's short-term trajectory can take advantage of the post-earnings volatility crush. The stock's Schaeffer's Volatility Index (SVI) of 36% is now in just the 21st percentile of its annual range, pointing to relatively tame volatility expectations now being priced into near-term options.

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