Technical Analysis: Netflix Stock Sets the Stage for Further Gains

Netflix Stock
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NFLX Stock: Path of Least Resistance Is Towards Higher Stock Prices

The stock market continues to churn higher, and new all-time highs are the order of the day. Fighting this bullish trend toward higher prices has been a mug’s game. I am returning to focus on Netflix, Inc. (NASDAQ:NFLX) stock because there are new indications on the stock chart that are implying that higher Netflix stock prices are now in development.

In previous publications, I kept explaining that $165.00 was an important price objective implied by the price action on the company’s stock chart. I even went out on a limb in my previous publication, titled “Time to Act as Netflix Stock Attains Its Objective at $165.00,” and stipulated that, since this objective was met, I would act accordingly and step back from my bullish view on this investment.

I did, however, stipulate a caveat that the overall trend was still toward higher stock prices, and that I would return to Netflix stock if the appropriate setup would present itself. That is exactly why I am returning to NFLX stock now. Recent developments on the stock chart are suggesting that higher stock prices are on the horizon. As a result, I have no recourse but to re-assume a bullish view on this investment.

The following Netflix price chart illustrates the price action that is currently suggesting that higher NFLX stock prices are on the horizon.

Netflix price chart

Chart courtesy of StockCharts.com

This stock chart highlights the technical price pattern called a cup and handle pattern.

This pattern develops as a result of a significant level of price resistance that prevents the stock price from advancing. This inability to break above price resistance causes the stock prices to react. These reactions cause two troughs to develop; the first trough is much larger than the second. These troughs create the characteristic cup and handle that this pattern is named after.

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On October 5, Netflix stock closed above $190.00, which was the price point that defined the significant level of price resistance. This completed the cup and handle price pattern, which implies that higher stock prices are now on the horizon.

The bullish implications suggested by the cup and handle price pattern coincide and, therefore, reinforce the price action that preceded it.

The following NFLX stock chart illustrates the bullish price action that preceded the completed cup and handle price pattern.

Netflix stock chart

Chart courtesy of StockCharts.com

In September 2016, NFLX stock closed above the very influential 200-day moving average. This indicator is created by averaging the stock’s closing price over the last 200 days and plotting that value on the stock chart.

The 200-day moving average creates a trend line that acts as a dividing line that segregates bullish investments from bearish ones. Distinguishing between these two polar opposites is as easy as determining which side of the trend line the investment is trading on. A stock trading above the 200-day moving average is bullish, while one trading below it is bearish. Closing above it in September was an indication that this investment was bullish once again and, as long as Netflix stock is trading above it, I can only assume that a bull market is in development.

A few short weeks after Netflix shares broke above the 200-day moving average, the stock price gapped higher. This event is highlighted on the stock chart as a breakaway gap. Breakaway gaps rarely get filled, and almost always indicate that a new trend has begun. This gap fits the bill because it never got filled, and it marked the beginning of an impressive move toward higher stock prices.

Another gap is highlighted on the NFLX stock chart in July 2017, except this event is labeled as a continuation gap on the chart. Continuation gaps suggest that a trend toward higher stock prices has reached a midpoint and that, therefore, higher prices are likely.

If I assume that the trend toward higher stock prices began with the breakaway gap, I can use this gap formation to create a potential price objective. Crunching a few numbers generates $220.00 as a potential price objective, which is now in play, based on the completed cup and handle price pattern.

Analyst Take: 

Developments on the Netflix stock chart are suggesting that another price advance is underway. As a result, I have to re-assume a bullish view on NFLX stock because the path to higher stock prices remains the path of least resistance. I will continue to hold this bullish view on NFLX shares until my objective is met, and/or there are indications on the company’s stock chart which suggest that another view on Netflix is warranted.