Preparing For The Next Fall In Netflix Shares

| About: Netflix, Inc. (NFLX)

It's a chart pattern that repeats itself perhaps more than any other. One in which paranoia, turn hope, turn back to paranoia eat away at the wallets of all but the lucky few who are able to time both entry and exit to absolute perfection. It marks the next nosedive in Netflix (NASDAQ:NFLX) shares.

Yes, it's that company again. The one that went from the near bottom of the totem pole to extreme heights while remaining endorsed by nearly every Wall Street analyst who dare not even speak of the glaringly absurd valuation. That is, before a series of unexplainable missteps by management suddenly sparked the profit taking that had until then surprisingly remained on the light side.

From the baffling attempt to nearly separate the company's DVD and streaming services to price hikes, CEO Reed Hastings seemed as if he was trying to turn away customers. Although in actuality his decision making was probably evoked more by the feeling the company was so solid it could do practically anything without the obvious negative outcome, Hastings soon learned just how valuable customers are. He also learned, or should have learned, that once customers are turned away they rarely return. What's more, they then typically inform others to avoid at all cost.

Thus, we are left in the environment in which Netflix is now left to fight. One in which customers are exploring their other options. Yes, as if the company's own missteps weren't enough, they are facing increased competition from companies known to dominate particular landscapes. There is Amazon's (NASDAQ:AMZN) effort to release its own stand-alone video streaming service along with a growing attraction to Redbox, a subsidiary of Coinstar (NASDAQ:CSTR). Even Dish Network (NASDAQ:DISH), which bought out Blockbuster last April, is snatching up customers.

Which brings us back to the disturbing chart pattern developing in Netflix shares. After losing almost 80% of their value in less than five months, shares had recuperated over 50% by early February to top $130. Buoyed by nothing other than an earnings report in late January that was not as bad as some had feared, the rejuvenation in share price amounted to nothing more than a few traders taking advantage of an apocalyptic drop that was due to pause. For if this was anything more, shares would not have contracted nearly 20% since while the markets, in particularly the Nasdaq, have reached new highs.

If the chart pattern isn't enough to fear you, the earnings projections in 2012 should really make the sidelines more appealing. After enjoying a 98% appreciation in earnings from 2009-2010 and another 44% jump in 2011, the company is projected to report losses for the first three quarters of this year. After beating estimates for the past 14 quarters, a red arrow next to future reports could leave the shares in another free fall.

For those still intent on holding shares, stop loss orders at $100 would be paramount as that level remains the shares' last strong line of support.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.