Netflix, Inc.: This Chart Suggests NFLX Stock Can Surge

NFLX Stock
Photo: Justin Sullivan/Getty Images

NFLX Stock: Bullish Tailwinds

Once again, I am back to give my insights on Netflix, Inc. (NASDAQ:NFLX) stock. I have been fortunate enough that my calls on this investment have been quite timely.

In my last report on Netflix, I outlined that my previous price target on NFLX stock had been met, that a small consolidation channel on the price chart had developed, and that I would use that pattern to define my risk.

NFLX stock proceeded to fall below the channel, and a sell-off quickly ensued. Not even the enthusiasm that followed the Donald Trump rally was enough to get a bid into Netflix stock and, for some odd reason, it actually caused NFLX stock to sell off even further. I can safely say that this price action was not company-specific to Netflix stock, because the sell-off was broad-based in growth and technology stocks.

The price action has caused me to raise some concern about this area of the market, as money continues to rotate into cyclicals and financials. If this trend continues, a much larger correction could be in store for these stocks.

The good news is that NFLX stock has actually fared a little better than its counterparts, and is still trading above key moving averages.

The following Netflix stock chart illustrates the price action over the last four months.

netflix

Chart courtesy of StockCharts.com

I was originally conflicted on the direction of NFLX stock when it was trading below the 200-day moving average. The 200-day moving average is the dividing line between stocks trading in a bull market versus stocks trading in a bear market. When the share price is above the moving average, it is bullish. When the share price is below the moving average, it is bearish.

So naturally, some of my conflicted feelings were lifted when NFLX stock broke above this moving average.

I became noticeably bullish when the golden cross was generated. A golden cross is a bullish signal that is produced when a faster 50-day moving average (highlighted in blue) crosses above a slower 200-day moving average (highlighted in red). Traders use this signal to confirm that a bull market is on the horizon, and it is always wise to trade in the direction of this momentum indicator.

It was at this point that I believed that the previous highs of $130.00 were going to be tested, and I expressed my bullishness in my previous coverage of Netflix that was published on October 11. Fortunately for me, my timing was impeccable, as earnings were released a few days later and Netflix stock surged in response.

Netflix stock did not quite get to my $130.00 price target, but in my last report on the company, I highlighted that the price of $129.29 was close enough, and I outlined the price that I would use to manage my risk and the trade.

NFLX stock has subsequently sold off, but the price still remains constructive, because NFLX stock still remains above both moving averages that generated the golden cross.

The lower panel is labeled “MACD,” which stands for moving average convergence/divergence. This signal is a simple and effective trend-following momentum indicator. Signal-line crossings are used to distinguish between bullish and bearish signals.

This indicator is currently converging, and a bullish signal is possible in the days ahead. If a bullish cross does occur, it would suggest that the previous level of resistance at $130.00 could be tested once again.

I always find it better not to assume that a signal is going to generate, but rather wait until it does. There is a cost associated with waiting, because potential profits are up for grabs, but I need to think about risk first.

Bottom Line on NFLX Stock

Selling has gripped momentum stock as money has been rotating into cyclicals and financials. Netflix stock has remained constructive during this sell-off, and the bullish signals remain intact. A new signal is on the verge of generating that could suggest that NFLX stock will once again retest the year-to-date high.