Resist temptation: Why Netflix still isn’t a buy

October 25, 2011, 10:06 PM UTC

FORTUNE — With Netflix down sharply today, you may be tempted to jump online and buy shares of the ailing video provider. After all, if it was worth $300 a share a couple of months back, it must be worth way more than the $70 it’s trading at now. Maybe you’ve read a contrarian piece about how everyone is overreacting to Netflix’s awful quarter. I’m here to tell you: don’t do it. Technical indicators are pointing to the conclusion that Netflix stock isn’t coming back anytime soon.

It’s a natural reaction if you watch the markets: A longtime leader in the stock market  has a bad day or an off-quarter and it must present a buying opportunity. After all, Netflix has been outperforming the broad stock market since late 2004, gaining 1,000% in that time while the S&P 500 has barely moved.

Setting aside the debate about Netflix’s business, there’s a basic reason shares won’t rebound: Since the last time Netflix traded around $78, April of 2010, to the start of this past September, it had 18 days when 10-million or more shares traded. That’s massive volume that helped propel Netflix to a high of $305 in July. While plenty of people have unloaded Netflix shares since September  (it has had 9 days of 15 million shares or more the past two months, primarily selling pressure)  the simple reality is that plenty of investors who bought it during that 17-month rally are still holding onto it. Statistical modeling suggests the big sellers of the past few weeks have been institutional investors, likely taking profits they made from investments years earlier. That means there are lots of individual investors who bought high who still own shares.

The future of Netlflix’s stock price is now at the whim of  human nature at work here: people don’t want to lock in a loss, they would rather wait and hope shares rebound so they can get out with “just” their original investment.  And that means every time Netflix rallies from here on out, shares are going to get pressured. That’s why many investors prefer to buy stocks at all-time highs — there is no pent up selling demand to cap upward momentum.

Don’t believe me? Look at the stock charts of one time surging market leaders like First Solar and Oracle . Both are a lot like Netflix: well-positioned in their segments, innovators with a history of executing fairly well, and have long produced strong sales and income. But once both those companies fell sharply due to the solar stock bust of 2008 and the dotcom bust of 2001, they haven’t been able to rally, even though by fundamental measures like price-to-earnings their businesses have only improved. And they didn’t have a CEO actively enraging customers.

All stocks ebb and flow. Reasonably orderly down days are often very good — they’re a sign of a sustainable bull run. You see this in the pattern of Netflix’s shares from 2004 through July. But a high volume down day where shares gap lower is a very reliable signal that buying momentum is broken. Consider that Netflix has had two of those in recent weeks. Its days of hitting all-time highs are as gone as Qwikster.

I’m not saying Netflix isn’t a good company. Every morning my wife and I buy a few fleeting minutes of peace by letting our daughters watch Yo Gabba Gabba through its streaming service. But there are plenty of legitimate fundamental questions too about Netflix’s future. Even if the naysayers are wrong about Netflix’s business, those who watch stock charts know the smart money is already out of Netflix and isn’t returning.