NFLX Stock: Abiding by the Rules
My propensity to identify key transition points in Netflix, Inc. (NASDAQ:NFLX) stock has been quite remarkable and a feat that I am quite proud of. Last summer, when I decided to focus on Netflix stock, I had no choice but to carry a neutral view on this investment because the method of analysis I employ suggested that this was the necessary position to hold. That all changed in October 2016, where certain developments suggested that a change in tide had begun, making it necessary to upgrade my neutral position on NFLX stock to a bullish one.
These certain developments I so speak of are all indications that were generated on the company’s stock chart. For anyone not familiar with my work, this method is known as technical analysis. This method of investment analysis is based on using historical price and volume data to project which direction an investment is likely to head in next.
The developments that generated my bullish view were the focus of my publication, “Netflix, Inc.: This Chart Shows Why NFLX Stock Could Explode Higher,” where I outlined the reasons why this view was warranted. On October 11, 2016, when that publication was written, Netflix stock was trading at $104.50.
It now sits at $157.72, substantiating that a bullish view was warranted. That publication is also where I first mentioned that an important resistance levels sits just north of $160.00, which is also the reason why I am focusing on this company once again.
In my last publication on NFLX stock, “Bullish Tailwinds Continue to Support Netflix Stock,” I outlined a potential price objective of $165.00. This level was hit on June 2, 2017, and because I preach a disciplined trading approach, it is time to act.
The following Netflix stock chart illustrates the indication that generated the $165.00 potential price objective.
Chart courtesy of StockCharts.com
This NFLX price chart highlights an alternating wave structure in order to define what bullish price action looks like.
This alternating wave structure contains impulse waves and consolidation waves. An impulse wave defines the progression of the stock price as it stages a swift and linear advance. A consolidation wave defines the unwinding of overbought conditions that were created during the preceding impulse wave, creating the necessary conditions so a new advancing impulse wave can develop. These waves essentially feed off each other, and as a result, this creates an environment where a sustainable trend can develop.
In January 2017, Netflix stock exited the consolidation wave in an upward direction via a “breakout,” indicating that this wave was complete. This served to indicate that a new impulse wave was in development. It was the combination of the consolidation wave and the impulse wave that suggested that $165.00 was a viable potential price objective.
If you’re wondering how the $165.00 price objective was obtained, let me explain. The theory behind impulse waves that are separated by a consolidation wave is that they have a tendency to mirror each other in terms of height. This theory was applied to obtain the price objective under the pretense that the initial impulse wave was $85.00 in length, meaning that the impulse wave that follows should match that length.
In accordance with my trading rules, once this objective is met, I am required to pull back from my bullish position. To date, this ideology has not been ill-advised because a pullback has always ensued after the specified level has been attained. The price objective for Netflix stock was met on June 2, 2017.
In order to create a trading strategy, adherence to rules is a must. Therefore, if I were looking to re-enter this investment, I would need to wait until new indications are generated that suggest that higher NFLX stock prices are likely to follow. This ideology may leave some profits on the table, but enforcing discipline is an essential ingredient to any successful investment strategy.
Bottom Line on Netflix Stock
My $165.00 price objective on Netflix stock was met, and in order to stay true to my trading strategies, it requires that I pull back from my bullish position. There are indications that still support an advance and I would therefore re-enter this position if new indications are generated that suggest that a new bullish position in NFLX stock is warranted.