NFLX Stock: Close Enough
Netflix, Inc. (NASDAQ:NFLX) stock reported better-than-expected earnings on October 17, 2016, and this event caused Netflix stock to gap up the following day. The move was not completely unexpected, as I had pointed out in my previous coverage on October 11 that I was bullish on this company.
My bullish view was strictly based on the patterns and signals that were generated on the NFLX stock price chart. This method of analysis uses price and volume as the framework to produce trading objectives. The body of knowledge I used for my analysis is known as technical analysis. I have been using this body of knowledge for over a decade, and I have had some success in doing so.
My objective on NFLX stock was $130. While that price has not been attained, Netflix stock did hit $129.29, and this level is close enough that it warrants a second look.
The following Netflix stock chart is where I produced my original price objective.
Chart courtesy of StockCharts.com
The pattern that produced the price objective of $130 is the 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.
The breakout from the pattern was further confirmed when NFLX stock generated a golden cross. A golden cross is a bullish signal that is produced when a 50-day moving average, highlighted in blue, crosses above a 200-day moving average, highlighted in red. Traders use this signal to confirm that a bull market is on the horizon and, in this case, to confirm the bullish bias generated by a bullish symmetrical triangle breakout.
The initial price objective of the triangle pattern is where it began, and that is where I got my $130 price objective. The $130 price is a major level of resistance, as it has halted any further progress of NFLX stock on two previous occasions. I find it wise to reassess investments at major levels of resistance or support.
The market indices have been trading sideways for a few months, and a trend has yet to develop. The sideways movement will end when the indices finally break out of this range. There is much uncertainty with regards to the presidential election and a possibility of a fed rate hike. Any one of these factors could act as the catalyst to send the markets trending.
NFLX stock is sitting just shy of the projected level where the triangle began, and it is close enough that I would set up an exit strategy, as the price surge happened over a short period of time. The exit strategy would serve to protect profits and manage risk.
The following Netflix stock chart illustrates the trading range that I would use to manage my risk.
Chart courtesy of StockCharts.com
The NFLX stock chart above illustrates the trading action that developed shortly after the earnings announcement. Netflix stock is trading with a consolidation wave that is just shy of my target price of $130.
I would use this consolidation wave to define my risk. If Netflix stock closes below this consolidation wave, I would act to further reduce my position, assuming that the price surge has run out of gas. But if Netflix stock rises above the consolidation wave, I can only presume that the run toward higher prices shall continue.
Regardless, I would take some profits off the table at this juncture, as my strategy dictates that I do so when a price target is met.
The Bottom Line on Netflix Stock
I am now neutral on Netflix stock, as my initial price objective has been met. This price was achieved in short order, and I would use this opportunity to reduce my position. Uncertainty regarding fed policy—and/or the election—could be the catalyst that starts a correction in the indices and NFLX stock.