Netflix, Inc. (NASDAQ:NFLX) initially gapped higher following its Jan. 18 earnings report, but since then, it has shown zero follow-through buying. Instead, NFLX stock has merely muddled sideways in an ever-tightening range.
But the nice thing about narrow ranges is that ultimately, they resolve in one direction or another. The current technical picture in Netflix stock has allowed me to clearly define two potential trades for traders and active investors.
Given all the hoopla the financial media makes about earnings around big and well-known companies, it’s ironic that often, the near-term reaction to these reports is a one-and-done move.
In other words, while any given company’s stock does tend to gap higher or lower following their respective earnings report, many times following the initial up or down gap, a given stock will settle into a consolidation period. During that time, it’ll work off the initial “shock” of the gap.
This current earnings season has already seen plenty such examples, and NFLX stock is one of them.
NFLX Stock Charts
For some perspective, let’s start out with a bigger-picture view of Netflix. In this case, we’ll look at a multiyear weekly chart stretching all the way back to 2012.
From this angle, we see that the 100-week simple moving average (blue) has acted as a good line of support in January 2015, February 2016 and again in July 2016. Following the summer lows, NFLX began a steep ascent into year-end which amounted to about a 50% rally. The stock then started strong into the new year and not only rallied into its earning report, but also gapped higher following the earnings report.
All of this then totaled the six-month move in the stock measured from the summer 2016 lows into the post-earnings highs from Jan. 19 to about 70%. A 70% rally is a notable move for any stock in a six-month period, even Netflix.
As a result of the year-to-date rally, NFLX stock surpassed its previous all-time highs from 2015 but in my eyes unless a better consolidation period comes to pass the stock now in this time-frame looks overbought. The MACD momentum oscillator at the bottom of the chart is but one signal of an overbought stock.
But to see both sides, and to be open-minded to any opportunity NFLX stock might offer us, we need to take a closer look at the daily chart.
On the daily chart, we see the aforementioned post-earnings rally and how NFLX stock has neither seen any follow-through buying after the up-gap nor any meaningful retracement lower to fill the gap. The consolidation pattern in which Netflix has traded since then could be labeled a wedge pattern, which good traders will respect as nothing more than a sideways trot that could resolve in either direction.
A daily close above $142.50 could open up a next upside target around $148 ,while a daily close below $137 would open a first downside target around $132-$133.
Be patient and trade accordingly. Until NFLX stock breaks out of this current range, it remains range-bound.
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