Up 57% from Its Original Breakout, What’s Next for Netflix?

by Darrin Donnelly on December 13, 2010

Click on chart to enlarge.

Click on chart to enlarge.

Netflix (NFLX) has been THE stock to own over the past few months.

NFLX originally broke out of a Double Bottom Base at $124.20 back on August 10th and it has climbed 57% since that breakout.

Technically speaking, NFLX has followed a textbook Darvas pattern during its rise. 

It tends to break out of a Darvas Box and into new highs, pull back to the top of the Darvas Box it just broke out of, build a new box, and then continue its move higher. 

It’s the nearly perfect “Darvas staircase” uptrend.

From a fundamental viewpoint, NFLX still has phenomenal earnings and strong expectations.  But we’re certainly starting to hear from more valuation critics as this stock continues to rise.

With a P/E of 73, many analysts are questioning whether NFLX has what it takes to continue to grow (and justify such a high valuation) in one of the most competitive and ever-changing business landscapes.

Netflix is much more than a DVD rental company.  It recognizes just how quickly the market is changing for “people who want to watch movies.”  On-demand, online streaming, mobile broadcasting, tablet viewing; it’s all one big battle between the latest technologies, the latest joint ventures, and the latest laws and regulations.

To call the competitive landscape NFLX is currently leading “uncertain” is a giant understatement.

So what’s a trader to do?  How long should you keep riding the NFLX run?

This is where I love the Darvas System. 

To succeed as an investor, you don’t need to be able to predict the future of movie-viewing technologies.  Nobody can possibly do this. 

Several innovative tech companies –like Apple and Google and Microsoft and about a dozen small companies you’ve never heard of before – are all going to battle it out for the future of this lucrative and constantly-changing marketplace.  Whichever company – or combination of companies – comes out on top is anybody’s guess.

But you don’t need to guess.  Right now, NFLX is the leader. 

Will they be dethroned eventually?  Only time will tell. 

What’s important is that NFLX is currently leading the way and their stock price and continued growth reflects this.

We can’t predict what will happen in the future, but we can see the present and right now, NFLX is in a clear trend higher.

So stop listening to all the talking heads on TV who are trying to predict the future of such an uncertain field.  Instead, just follow the trend.

We follow the trend by setting stops below key support levels and until those support levels are broken, there’s no reason to exit this stock.  (Current stops are available in Darvas Trader PRO.)

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* Portions of this article appeared in the December 13th issue of Darvas Trader PRO.  You can access the full issue by clicking here.

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