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NFLX Chart Looks Really, Really Bad: Nathan

Netflix
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Netflix

Netflix shares are having their worst day since late January on virtually no news (unless you count speculation Carl Icahn is selling as news). And if the charts are any indication, the pain could be getting a lot worse.

Technicals are just one of many inputs I use to fashion my investment ideas. But when a chart gets this ugly—we're talking Francis Bacon meets Jackson Pollack ugly—you almost have to sell, or at least be super cautious.

With Monday's sell-off, Netflix is in serious danger of breaking the "neckline" of what traders call a "head and shoulders" pattern.

So why is this important? A head and shoulders pattern literally looks like the head and shoulders of a person, with the peak representing the "head," and the two mini peaks representing the so-called "shoulders." But what it really represents is a level at which investors look to sell.

Why's that? Because the second "shoulder" pattern represents a well-defined top, and when stocks get to those types of levels, two types of investors look to sell: those that bought at the top—or in this case, the "head"—and simply want their money back, and those that bought at the bottom and are now looking to take profits.

Either way, there's a rush for the exits, and that's exactly what's set to happen right now in Netflix.

So what's the next stop?

If we break this so-called neckline of the head and shoulders pattern, the next line of support is $160. Below that, we're talking $140 since that is the 50-day moving average and the level the stock gapped up to on earnings.

Dan Nathan is the co-founder of RiskReversal.com and a contributor to CNBC's "Options Action."

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