Don't Ignore This Chart!

Netflix (NFLX) Approaches The Climax Of This Plot

Greg Schnell

Greg Schnell

Chief Technical Analyst, Osprey Strategic

Whew, Netflix (NFLX) has been an action thriller. In the last year, the roller coaster stock price is on its 5th move of at least $120. Nothing like a plot that takes your emotions both ways! The real question is what is going to happen now.

First of all, the current price action as it approaches the same price as the top on the left side is important for pattern watchers. When we get this structure of a potentially lower peak on the right side, we are worried about a head/shoulders top. The cautionary news is that the stock also has to reach this price in order to move to new highs at some point. I have chosen to plot the MACD indicator only because the action on it is also demonstrative of a head/shoulders top. The MACD on this weekly chart down near zero as the stock approaches the right shoulder is cautionary. The reason for that is the setup before it. Netflix was making a divergent, lower high on the MACD in July/September compared to the head of the structure making a higher high. Now we have the setup for this topping pattern going into this right shoulder. To now have another lower high on the MACD is concerning. While this lower high has not happened yet, the recent swoop below the zero line on the MACD suggests momentum is extremely weak. 

I also looked at the SCTR, the relative strength to the $SPX, the OBV and the accumulation/distribution indicators. They didn't foretell anything helpful in my eye so I didn't post them here. 

If we continue to have broad market weakness, I would expect Netflix to sell off as it is a very high multiple, momentum trading stock. It also has every cable company in every market starting to create their own version of streaming shows. Locally, we have three new competitors to Netflix in the last few months. Every major tech company like Amazon, Google, Microsoft, Apple and more are also working to compete in the space. Any one of these companies could roll out an international platform quickly. 

The bottom line is Netflix (NFLX) is a great company with a great story. It is not immune to competition or a sudden downturn in the market. Stocks top when the opportunities ahead look the best, not when they are well past their prime. Netflix has the ingredients of a classic topping pattern setting up. Extreme volatility, wide swinging ranges, declining momentum and a lofty valuation. On the positive side, it continues to grow subscribers internationally and this wide range could be just a big consolidation before they become the global on stream powerhouse of the future complete with their own content development. Perhaps this price action was just a pause in the long term growth of Netflix. As technicians, we have seen both of these movies before. The real question is which ending will win out?

Watch the price action closely on Netflix here. It will be important either direction for the long term and the big clues happen right around this level. Don't Ignore This Chart!

Good trading,
Greg Schnell, CMT

Greg Schnell
About the author: , CMT, MFTA is Chief Technical Analyst at Osprey Strategic specializing in intermarket and commodities analysis. He is also the co-author of Stock Charts For Dummies (Wiley, 2018). Based in Calgary, Greg is a board member of the Canadian Society of Technical Analysts (CSTA) and the chairman of the CSTA Calgary chapter. He is an active member of both the CMT Association and the International Federation of Technical Analysts (IFTA). Learn More