The Netflix (NFLX) Breakdown

by Ryan Mallory

It's probably one of the biggest stories among individual stocks for 2011. A company that was breaking through $300 and on its way to $400, gets too comfortable in its own shoes, and instead of continuing to satisfy its existing customers and provide new and improved features, the CEO and his minions, out of the blue hikes prices on its one and only product (yes, NFLX is a one product company) by 60%.

But not only do they unexplainably increase their pricing in a price competitve market, they literally split the company in two among DVD rentals and online streaming, and creates a new name for half of the company called Qwikster, which is best represented by a pot-smoking Elmo.

And let's be honest who really thought NFLX would be at $70 at this time back in July? That's right, no one! But now that NFLX is below $70, we have to ask ourselves where does thing this thing bottom out at (I tried it once at $121 with some options, and boy was I fooled), and where does a good entry exist at?

Well then, let's break it down.

• Face it, something is drastically wrong with this company. This isn't your classic value play, and there are rumors a plenty out there surrounding this company's ability to remain relevant in the coming months and years. I can't tell you what's truth versus fiction, but this is no buy-and-hold play. The company jacked their prices up for the one and only reason that they have a broken business model that was flawed from the start and unable to be maintained.
• Is it cheap versus historical pricing? Yes. But so was JDS Uniphase (JDSU) and Sun Microsystems (JAVA). This stock is no different. A bubble internet play whose Cinderella story went horribly wrong when the clock struck midnight. 
• If you trade this stock, it is tempting to play it from a "I'm going to buy it and hit a home run". Treat it like any trade, and look for an edge, and take the gains by moving up your stop-loss. Sure it could bounce back up to $100 or more, but it could just as easily go sub $50 on you. 
• Expect for the shorts to pounce on this thing every chance they get. Just picture a wounded gazelle being stalked by a pack of blood thirsty hyenas. Therefore in the short-term, every bounce should be considered unsustainable. 
• Ideal entry is on a break of the downward channel. Until the stock breaks through this resistance, don't buy it. It is also preferable for the price to be above the 10-day moving average as well. 
• Play this stock with a wide stop-loss and if that means cutting down on the position size, then so be it. 
• Finally - this stock, even on a good day is one of the most tricky stocks to trade. Often times it will trade inverse to the market, and other times it will rip higher like there's nothing that could ever stop it. So don't expect its behavior to be rational, because its never been that way.