NFLX Stock: A Breakout is Brewing
Watching trades set up and develop over time has taught me a lot regarding a trader’s mentality. Certain price points can become sticky and represent a major level of support or resistance. Netflix, Inc. (NASDAQ:NFLX) stock is a great example of sticky price points. NFLX stock peaked on August 5, 2015 at $129.29 and, a few short weeks later on August 24, 2015, shares bottomed at $85.50. Netflix stock has been range-bound ever since. This sideways trading action cannot go on forever and will resolve itself one day.
That is what I would like to discuss, because there is evidence suggesting that Netflix stock is currently building momentum and that the directionless trade will soon end in a spectacular fashion. This presents an opportunity for traders who are not yet in the trade to catch the position as it resolves itself. The only question that really remains is in which direction will shares break?
The stock chart below illustrates the range-bound trade I am referring to.
Chart courtesy of StockCharts.com
Resistance has only been tested once, but the same cannot be said for support. Support marked by $85.00 has been tested on four occasions and continues to hold. On average, support levels break after the second test. The bullish camp is really holding this line and is doing a great job at it.
If you notice the right side of the chart, each and every bounce off $85.00 is getting smaller, and a small downtrend has developed. This type of price action suggests that momentum is currently building.
The following chart illustrates the pattern that is suggesting that momentum is currently building.
Chart courtesy of StockCharts.com
The downtrend that has developed in Netflix stock is as clear as day. A line is used to connect the peaks and a trend is created as the moves from the upper left to the lower right.
Each subsequent low is confirmed by a lower high. This is no ordinary downtrend; a powerful move seems to be brewing.
The pattern within the downtrend is indeed special. Each progressive move higher and lower is shorter in duration, and the range itself is shrinking. The pattern represents a coil as the share price spirals towards the centre line; momentum is built up until enough energy is created to break the pattern.
This price action represents both bulls and bears fighting and supporting their view. Each time, they take a step forward in their valiant efforts, and the battle line draws closer. The eventuality of this trading action is that one camp is victorious and the other is sent running. Running would mean that the pattern has broken and the camp that lost has begun to exit or cover their respective positions. The longer this patter progresses, the more powerful the reaction that follows.
A resolution of this coil will occur when Netflix stock can either break above the downtrend line or break below support at $85.00. Once a break occurs, a price objective can be attained
The deepest portion of the downtrend is approximately $35.00. The expected move from the resolution of the coil is a move of that magnitude. The projected price objective of a break if it were to occur now is $130.00 on the upside, and $50.00 on the downside. There are a number of option strategies that one could use to capitalize on this projected volatility.
The Bottom Line on Netflix Stock
NFLX stock has now spent nine months trading within a coil-like pattern. These patterns are known to build momentum. When enough momentum is built up, shares will surge and break out of the range that has defined trading over the past year. It is wise to stand aside and wait for a break, or use an appropriate options strategy to capitalize from the coming volatility.