Chart of the Day – Whither $NFLX ?

by Enis March 18, 2013 1:02 pm • Commentary

Netflix is not a stock for the faint of heart.  Lest you needed any evidence, here is the 3 year weekly chart:

NFLX 3 year weekly chart, Courtesy of Bloomberg
NFLX 3 year weekly chart, Courtesy of Bloomberg

So a move from 75 to 300 in less than 18 months, and then a fall from 300 to 75 in only 4 months.  That’s a fast escalator up, and a speed-of-light elevator down.  After that rapid collapse, NFLX spent the whole of 2012 tracing out a base.  It exploded higher on strong earnings and subscriber numbers in January, and hasn’t looked back since.

In the past 6 weeks, the stock has traded between 175 and 200, with a much reduced volatility profile after it more than tripled from October to January.  So after that monster move, and the recent range, is NFLX poised for renewed strength or eventual weakness?

Several points to note on the 6 month chart:

[caption id="attachment_23788" align="alignnone" width="629"]NFLX 6 month daily chart, Courtesy of Bloomberg NFLX 6 month daily chart, Courtesy of Bloomberg[/caption]

First, the stock had a very high RSI condition for about a month after its earnings gap (indicating unrelenting buying pressure), an incredible condition for a stock that had already gapped up 35% in one day.  In the past month, as NFLX has carved out that 175-200 range, the momentum reading on the lower RSI panel has declined.  Normally, such a momentum divergence could be the beginning of a short thesis, but not in this case.  The overbought reading was so strong between Jan and Feb, such a condition is usually followed by a higher high at some point.  Usually does not mean for sure – just that the odds of these types of setups favor a new high in NFLX in the coming months more often that not.

But I certainly wouldn’t get long NFLX here, not after the stock is up more than 200% since the fall.  Moreover, one data point in the bears’ favor is how the short interest has moved in NFLX in the past 6 months.  Here is the 3 year chart of the total shares borrowed to short:

[caption id="attachment_23790" align="alignnone" width="627"]3 year chart of Short Interest in NFLX, Courtesy of Bloomberg 3 year chart of Short Interest in NFLX, Courtesy of Bloomberg[/caption]

The short interest has moved from a peak of 17.2m shares short on Oct 31, 2012, to only around 8m shares today, near the lows of the past 3 years.  In other words, I don’t anticipate much incremental demand from short covering in the name.

Finally, the implied volatility picture is intriguing.  30 day implied volatility (red line) and 30 day realized volatility (blue line) are near 2 year lows:

[caption id="attachment_23791" align="alignnone" width="650"]IV-30 vs. HV-30 in NFLX, Courtesy of LiveVolPro IV-30 vs. HV-30 in NFLX, Courtesy of LiveVolPro[/caption]

However, given how far NFLX has come in such a short period of time (best illustrated by the high realized volatility reading to start 2013), it’s surprising that NFLX implied volatility has depressed so quickly.

I have no strong directional view on NFLX here.  Bullish technical points:  Large volume on earnings move and post-earnings momentum very strong, short-term support at 175 close to current stock price.  Bearish technical points:  slight momentum divergence near 195, short interest at 3 year lows.  So implied volatility seems priced a bit cheap, but I don’t see a trade since I don’t have a strong directional view.  For now, this is a stock in the watch-and-wait bullpen.