Netflix Signals A Buy

06/29/12 01:48:46 PM

by Koos van der Merwe

Netflix has been a volatile stock over the past year. Is it worth investing in?

Security: NFLX
Position: Accumulate

Talk of Netflix (NFLX) has been on everyone's lips over the past year, reaching a high of $304.79 on July 29, 2011, and then falling to a low of $62.37 by November 30, 2011. Management has made mistakes, and contracts with companies that supplied them with movies have expired and not been renewed. Movies and TV shows offered by them, although plentiful, are not up to date.

For the moviegoer who wants to watch the latest movie out there, Netflix is not the answer. Yet we should not forget that they were part of the trend to put Blockbusters out of business. Are they a company worth investing in, or is there too much opposition now?

FIGURE 1: NFLX, MONTHLY

Graphic provided by: AdvancedGET.

Figure 1 is a monthly chart and shows how the price moved from a low of $2.42 in October 2002 to a high of $304.79 by July 2011. From this high, the price dropped dramatically to $63.65 by November 30, 2011. The chart shows how the price then rose to $135.88 on a relative strength index (RSI) buy signal and promptly fell to $60.37 with the RSI still in buy territory, suggesting a possible divergence buy. What does the daily chart suggest?

FIGURE 2: NFLX, DAILY

Graphic provided by: AdvancedGET.

The daily chart in Figure 2 shows how the price fell from a high on August 31, 2011, to gaps at a low of $62.77 by November 30, 2011. The RSI started suggesting a buy signal as early as October 12, but this was not confirmed by the JM internal band indicator, which only gave a buy signal on January 4 when the RSI was in overbought territory.

The price continued rising and on a gap to a high of $133.98 by February 7, 2012. A JM sell signal was given on February 21 with a fresh JM buy signal on March 20 that failed as the RSI continued falling. A new JM sell signal was given on April 5, and the price fell on a gap to a low of $60.80 by June 1. The RSI is suggesting a divergence buy and the share price has moved up, but it has not given a JM internal band buy signal.

With what appears to be the formation of a double bottom, I suggest that we should only consider buying should the price break above $106.83. With the RSI rising and finally with the JM internal band indicator suggesting a buy should the price break above the upper band at $70.24, the stock does indeed look interesting.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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Netflix Signals A Buy

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