Shania Twain is on tour. The Toronto Blue Jays are in first place. Technology stocks are at record highs. Congrats millennials! You actually brought back the 90s.
And no other stock has represented this dot-com mania 2.0 quite like Netflix, Inc. (NASDAQ:NFLX). In less than two decades, this streaming media service has transformed how people watch TV. The company has single-handedly overturned the cable TV business and pushed rivals to offer standalone services at affordable prices.
But like the dot-com bubble of yesteryear, investors are prone to getting overzealous when a fancy new technology hits Wall Street. Over the past three years, Netflix stock has soared from $8.00 to $98.00 per share. The company now sports a market capitalization of $48.0 billion—awfully rich for a business that made only $267 million in 2014.
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“I think it probably shows what at least I should keep my day job and not try to be a stock picker,” Netflix CEO Reed Hastings replied when asked about his company’s soaring stock price on a conference call a few weeks ago. (Source: Netflix (NFLX) Wilmot Reed Hastings on Q2 2015 Results – Earnings Call Transcript, July 15, 2015.)
“When the stock was half this price I described it as euphoric, so it’s a mystery to me. I think I’m out of the stock commentary business.”
But stock prices cannot be supported on euphoria alone. Eventually, profits have to explode in order to support the company’s valuation or NFLX stock will plummet. And there’s good reason to suspect the latter.
Let’s take a look at the charts.
Chart courtesy of www.StockCharts.com
As you can see in the chart above, Netflix stock is forming a clear head-and-shoulders pattern. This common, easy-to-spot event often signals the end of a bull run. We can break down the chart above into three sections.
- Left Shoulder: Bulls push prices upwards making new highs; however these new highs are short lived and prices retreat to $105.00.
- Head: Prices don’t retreat for long because bulls make another run, this time succeeding and surpassing the previous high; a bullish sign. However, prices retreat once again, only to find support at $105.00.
- Right Shoulder: The bulls push higher again, but this time fail to make a higher high. This is very bearish, because bears did not allow the bulls to make a new high or even an equal high. The bears push prices back to support. But at this pivotal moment, the bulls fail to make another push higher and the stock breaks below support.
More concerning, though, is the volume. The number of shares being exchanged is important because it can be used to confirm trends and chart patterns. Any price movement up or down with relatively high volume is given a greater weight than a similar move with weak volume.
That’s why, if you are looking at a large price movement, you should also examine the volume to see whether it tells the same story. During the bull run, NFLX stock saw higher volume on up days and lower action on down days, suggesting the stock was under accumulation. But now that pattern has reversed, indicating smart money investors are unwinding their positions.
Bottom line: the bull run in NFLX stock appears to be over, at least for the time being.