Netflix, Inc.: NFLX Stock Chart Suggests Ominous Implications
NFLX Stock: Storm Brewing?
In my time, I have come across a few charts and chart patterns that left me quite concerned. These concerns are based on chart patterns that look quite ominous, and they have suggested a possible extended drop in share price. The Netflix, Inc. (NASDAQ:NFLX) stock chart has instilled in me this same ominous feeling, and I am quite concerned as to what may develop.
Big movements in stock usually occur when no one is expecting them. Volatility tends to drop off right before a big move, like the calm before the storm. Could a storm be on the horizon for NFLX stock? Perhaps the Netflix stock chart can give me further insights.
The following Netflix stock chart illustrates the driver behind my ominous feeling.
Chart courtesy of StockCharts.com
Since its inceptions, Netflix stock has been trading within a large ascending channel that has spanned 14 years. An ascending channel has two trend lines that define the upper and lower bounds. The share price oscillates between these two lines for as long as the trend permits.
2015 marked the year in which NFLX stock hit the upper bound of this channel. My concerns stem from this chart specifically. Each and every time Netflix stock hit the upper bound of this channel, a selloff developed shortly afterwards that drove the price to the lower end of this channel. The lower end of the channel is currently sitting at $22.00 and would represent a considerable loss if the price were to drop to that support area.
The following NFLX stock chart illustrates a few developments after that upper bound was hit.
Chart courtesy of StockCharts.com
The NFLX stock chart above does very little to alleviate my concerns. There are two distinct signals from this chart: the death cross and the symmetrical triangle. At this moment, these two indicators are producing signals that are in conflict.
In February 2016, NFLX stock generated a death cross. A death cross is a bearish signal that is generated when a faster 50-day moving average crosses below a slower 200-day moving average. This momentum indicator signals that the bears are now in control, and that a bear market is on the horizon. I always found it wise to trade in the direction of this signal. Based on this premise, I could only warrant holding a short or neutral position.
The pattern that is highlighted on the chart is a symmetrical triangle. A symmetrical triangle, by definition, is a consolidation pattern that contains two converging trend lines. One line represents resistance and the other represents support. Traders refer to triangles as a zone of indecision, as the prior move is digested. These patterns are particularly explosive because, as the pattern progresses, momentum gathers speed.
On average, symmetrical triangles are continuation patterns and they follow through in the direction of the trend that prevailed prior to the pattern, but this is not always the case. Symmetrical triangles patterns often have five points of contact before the pattern breaks in either an upward or downward direction. On average, a breakout usually occurs when the pattern has completed 70% of the triangle. Netflix stock has fulfilled this criteria and has broken out to the upside in August, generating a bullish signal.
This is where the problems lie, and those problems compound the precarious position that Netflix stock now sits. One indicator is bullish while the other is bearish. These indicators basically cancel each other out. The range in trading has also diminished and the price is currently being cradled by both moving averages. Volatility in NFLX stock has dropped off. Is this the calm before the storm I was referring too?
I would need to wait for both signals to confirm the premise in order to generate a proper bias. If prices can rise, it increases the chance of a golden cross and will negate the bearish signal alluded to by the death cross. If the price falls below $85.00, this would effectively break the bullish bias left by the triangle and would confirm the bearish outlook.
The Bottom Line on Netflix Stock
Given the conflicting signals that are currently in play for Netflix stock, my bias on this position is neutral. I prefer to be on the sidelines awaiting further confirmation signals that can sway my bias to either bullish or bearish. The next price move in NFLX stock may be enough to swing that bias, but the possibilities of much lower prices might keep me sidelined for quite a while.
