Netflix Short Sellers Round the Wagons Ahead of Earnings

Netflix, Inc. (NFLX) stock has stalled at harmonic resistance about 50 points below 2018's all-time high less than one week before the company reports first quarter earnings on April 16. Short sellers have taken note of the weakening tape and are rounding the wagons, ready to reload aggressive positions if the company fails to beat expectations that were sharply reduced during January's fourth quarter confessional.

Analysts now expect the entertainment giant to report earnings per share (EPS) of $0.57 on $4.50 billion in quarterly revenues, with reduced guidance making it easier to beat expectations. Shareholders have high hopes that the latest hike in subscription prices will translate into greater income rather than fewer customers, and the stock could drop a quick 20% if metrics fail to support that optimism.

In addition, Netflix will face new competitive threats from Apple Inc. (AAPL) and The Walt Disney Company (DIS) in coming years, at the same time the streaming industry approaches customer saturation, similar to what's happening with smartphones. Even Europe is getting into the competition game, highlighted by the upcoming Britbox release in the United Kingdom. International growth has underpinned revenues for Netflix in recent years, and a downturn in this category could induce shareholders to dump positions.

The company came public as a mail order rental service in May 2002, opening at a split-adjusted $1.16 and entering a steep downtrend that posted an all-time low at 35 cents in October. The subsequent uptick reached the IPO opening print in the first quarter of 2003, yielding an immediate breakout and uptrend that stalled at $5.68 in 2004. It reversed at that level in 2008 but held up well during the economic collapse, finding support at $2.56 ahead of a bounce that reached new highs in the fourth quarter of 2009.

A decline into 2012 ended on top of new support in the single digits, marking a historic buying opportunity ahead of a powerful uptrend that ended in the $130s in 2015. Netflix stock cleared that level after the presidential election and added to gains at a rapid pace into June 2018's all-time high at $423, ahead of a correction that ended in December at an 11-month low. The first quarter bounce stalled at the .786 Fibonacci retracement level in March, yielding mixed action into April.

The monthly stochastics oscillator entered a buy cycle in January and reached the overbought zone last month, at the same time that price reversed at harmonic resistance. This may be significant because the .786 ratio has the power to end rallies, often dead in their tracks. Meanwhile, the weekly oscillator has entered a sell cycle that has now reached the panel's mid-point, increasing shareholder risk into the earnings release.

The on-balance volume (OBV) accumulation-distribution indicator posted an all-time high with price in June 2016 and entered a distribution phase that ended in December. Buying power stalled at the .618 retracement level in January and hasn't exceeded that level in the past three months. This marks a bearish divergence, underperforming price action while exposing inadequate sponsorship that could trigger a long-overdue downturn.

The rising wedge pattern in place since January is holding support at the 50-day exponential moving average (EMA), highlighting the price to watch following a sell-the-news reaction next week. The stock has traded above this level since Jan. 4, and a violation would set off a short sale signal. Conversely, wedge resistance (black line) has now aligned at the .786 retracement, predicting that a rally above $385 would attract the firepower needed to lift price back to last year's high.

Short sellers may reload aggressive positions if Netflix fails to exceed reduced first quarter guidance on April 16.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.