One of the hottest stocks to have reported earnings this week was movie subscription giant Netflix (NFLX). The Q4 Netflix earnings report came after the close of trading Wednesday, and thanks in part to beats on both the top and bottom lines, NFLX stock staged a big, significant rally.
Netflix said it added 2.3 million domestic customers in the fourth quarter and issued strong guidance for the coming quarter. Also on the outlook front, NFL said its international business is increasingly looking strong, and that it is testing pricing strategies that would help further bump up revenue and stay ahead of the increasingly stiff competition in the space.
NFLX stock finished up 16.5% by the end of Thursday’s trading in what was a technically significant move on all fronts. Shares hit new 52-week highs of $395.54 and closed just a little off those intraday highs.
Simply put, NFLX continues to trend higher in the bigger picture, and it’s best not to fight that trend until price action gives confirming signals. Sure, Netflix stock has given us plenty of warning signals and rustling in the undergrowth, but a real breakdown in the underlying trend has not yet occurred.
From a momentum perspective, the entire 2013 rally in NFLX stock came on decreasing momentum, as measured by the RSI oscillator in the lower half of the below chart. With Thursday’s rally, however, the RSI has perked up meaningfully and looks like it could break this trend of lower highs, which also would speak for still higher prices in Netflix stock.
On the daily chart, Thursday’s big rally in Netflix stock was predicated by several bullish candlesticks in recent trading days, which now serve as a retr0spective confirmation of sorts that Thursday’s rally came from a solid level of support and likely has staying power. Also note that Netflix’s 100-day simple moving average (blue) acted as a support area in conjunction with the candlesticks, which is to say that yesterdays’ rally in NFLX stock came from a so-called technical confluence area of support.
Not surprisingly, the post-earnings rally came on very above-average volume, and this combined with the aforementioned bullish points now sets Netflix stock up to continue rising toward the $410-$420 area.
In the immediate term, however, NFLX stock may well need a little rest to consolidate Thursday’s fireworks.
When and where would Thursday’s rally be called a liar?
A drop for NFLX stock below the $355 area, or a little more than 50% of Thursday’s move — which coincides with the 50-day moving average — would quickly call into question the new upside momentum.
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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.