Four days ago, with the stock closing at $161.64 (see previous blog) we opined that this thing should trade to about $125 to complete a symmetric a-b-c pattern. It did those extra $36 in 3 days and bottomed (so far at least) at $125.25. I call that a whole-hearted recommendation for the efficacy of EW, not that I need convincing. Now , as always, time is the Achilles heel.
Netflix was clearly, and without a doubt , in a bubble early this year. The problem is, like Keynes said, the market can stay at ridiculous levels longer than you can stay solvent. However, EW gives you some certainty even in the event that you might be too early, which invariable happens when using common sense when the market does not. Here are the charts then and now;
You may miss count a wave or two but in the end , after 5 waves are done the stock typically drops 62% or to the 4th wave, either of the entire sequence of of wave 3 itself! This is invariable a lot lower than where you sell short. This is not to say that it might not be a good idea to get out every now and than, provided you keep getting back in at higher levels. Fundamentally there never was any justification for this stock to trade at above $100 , let alone at $300.
In any event we were clearly too early with our recommendation to sell at around $225. But even if you had, and even without getting in and out, you would today be up nearly 30% in half a year. The stock should go lower yet. 62% is just under $125, the 4th of 3 is around $100. c=b of this zig-zag in progress at around $125. So $125 seems to be a reasonable target for the downside, initially. After the dust settles much lower levels could be reached.
Early Feb I suggested this was a good short, with the caveat that that should only be done by way of an option. Since then it went another $20 higher but we may be at the beginning of a serious decline. With its p/e then above 74 and more shorts on it than I have seen on just about any stock lately, this thing definitely needed the “greater fool” to come along steadily to keep the game going. Facebook’s entry into this field seems to have unglued the optimist a bit. My best guess, using EW, is that this stock could trade at $91 or lower before the year is out. But as always, no promises.
Got this one wrong the first time (it was not a sell @ $156!) so here is another look.
The data on the right is from Bigcharts, if it is correct this is scary. Who says we are in a bear market? At $220 it has exceeded the meteoric rise of our own darling stock Nortel which never got higher than $124.55 Yield , there is none. P/E a very modest 74.27, even Japan did not get above 65. Short interest, I have never seen this before, a mere 21.48%.
The count on this thing might be 1-2 1-2-3-4-5 4-5 and just about complete once the upper trend-line is hit. This is obviously a short but I would not touch it other than with put options. This is a momentum trade if ever there was one, it will end in grief once the last “greater fool” leaves the stage. Ironically this is happening just as that other movie rental company is up against the wall.