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Netflix has recently been crowned the unofficial king of streaming services and it’s scheduled to report earnings this evening. The earnings report could be another good one, but the stock technicals are flashing some warning signs for long-term investors. We hold a 3% allocation of NFLX in our Tactical Alpha Growth portfolio at Inside Edge Capital and I’m near-term constructive, but do have some concerns for the company both on a fundamental and a technical point of view beyond the next few weeks. There are rumblings of a strong number this evening. You may recall in October that NFLX significantly exceeded third-quarter estimates. From a fundamental standpoint, NFLX has been anointed ‘the one’ in the streaming space after delivering on multiple initiatives. It successfully tackled its password sharing problem (opportunity), launched ad-supported tiers to reach multiple consumer levels, seemed to have successfully navigated the writer and actor strikes from last year, and subscriber growth and ‘stickiness’ seems to be in moving in the right direction. Analysts see a strong growth path ahead as EPS is expected to grow 30% this year and nearly 60% next year. And that’s where the issues begin. Too high expectations? With so many market observers still calling for recession in 2024, the fear is NFLX will be impacted by price elasticity of demand as customer’s personal budgets become strained. Combined that with such strong projected growth rates creating a stretched forward valuation making investors even more cautious. At the current price of $486.50 and an expectation of $15.94 in earnings, that puts NFLX at 30.50 times 2024 earnings. The current PE is 39.70 with current earnings of $12.25. Personally, I am not in the recession camp and think we already saw a recession when GDP contracted in the first half of 2022 and think the consumer is in decent shape. But as a trader and investor who exists watching both the technicals and fundamentals, there are two causes for concern that I am watching closely. Not keeping pace with peers First is a charting technique called ‘Relative Rotation’ created by Julius de Kempenaer. It allows you to trade a group of instruments as they gain or lose relative strength and momentum to a benchmark such as the S & P 500. They generally rotate in a clockwise direction indicating your selected instrument is gaining relative strength and momentum to your chosen benchmark, the S & P 500 in this case. If you strive for alpha in your portfolio, or outperformance versus the benchmark, this is a great tool to identify stocks to focus on and stocks to avoid. Looking at the left RRG that is showing monthly rotation from Sept ’23 to today you see the 3 major communications stocks META, GOOGL, and NFLX in the top right green “leading” quadrant. All three have maintained their position in the monthly leading quadrant but the arrows have turned lower in the last few months indicating some momentum loss. Hope is not lost, yet. Turning to the weekly RRG that is obviously a more active smaller time frame we’re looking at the rotation since the 1st week of December. GOOGL and META turned back higher in a sharp hooking manner reasserting their leadership over the benchmark S & P 500. NFLX however has not followed suit in the past 2 months and in fact is heading in the other direction. Hitting resistance Turning to the more traditional weekly candlestick chart we see the amazing rally NFLX has enjoyed from the 2022 lows, but it’s interesting to note that NFLX has not yet exceeded the 2021 highs and thus is still in ‘retracement mode’. Specifically, NFLX exceeded the traditional and highly visible 61.8% retracement at $401. Personally I observe another retracement ratio that I think is more powerful and the location of many reversals that catch hopeful trend-following investors off guard; the 78.6% retracement. Currently the .786 retracement for NFLX is at $513. It’s a bit esoteric, but if you take the square root of .618 retracement you’ll get .786. I know, I know, but I’ve seen so many reversals happen at this level it’s downright spooky. It’s either the point at which stop loss running efforts through the .618 retracement exhaust themselves, or it’s actually uncovering some hidden order in the market. A discussion for another time. The good news is if the stock exceeds this “retracement of last resort” the implications are for new highs to be made. It’s a major decision point. So, pulling it together tonight for earnings; The stock is priced for perfection creating a stretched valuation according to the fundamentals The stock is not participating in the sector rotation into communications to the degree of its two big brothers in the group It’s below the retracement of last resort at $513 I will be watching the report and ensuing reaction very closely and make a determination what to do with my 3% allocation here. Any reaction lower and I will look to reduce my holdings here. DISCLOSURES: (Gordon owns NFLX personally and in the wealth management business.) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. 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