Netflix, Inc. (NASDAQ:NFLX) rallied 3.4% on Thursday, staging a fresh near-term breakout that got every day trader under the sun excited and tweeting. While I’m not one to chase stocks higher or lower, both the chart and the current low-volatility market environment could indeed lead to more near-term upside in NFLX stock.
When analyzing stocks, one can apply one of two basic theories — top-down or bottom-up.
By classic definition, top-down analysis looks at the broader economic environment first, then drills down into sectors, groups or single stocks that may perform well in that environment. Bottom-up analysis, on the other hand, focuses on the analysis of an individual stock and its fundamentals and then makes a call (buy, sell or hold) based on the company’s individual story.
Over the years, I have found that both of these analysis types have their merits. But my preferred way of analysis is a hybrid of these classic definitions, whereby I also take into consideration the broader stock market’s risk for appetite, as well as the chart trends in the near-, intermediate- and longer-term time frames.
When I apply my analysis on NFLX stock, I see a company with near cult-like following, a business with a strong growth story and a stock that is in the middle of the pack of a group of stocks that investors have to chase higher.
That makes it hard to bet against Netflix for anything longer than a near-term trade.
NFLX Stock Charts
Looking at the multiyear weekly chart, we see that Netflix spent the better part of about 18 months — from late summer 2015 into early 2017 — in a wide and wild trading range.
In summer 2015, the stock became notably overheated and overextended above even its longer-term moving averages. This led to a much-needed consolidation phase that held support at its 100-day simple moving average (blue). Finally, in early 2017, NFLX shares began to break out of this wide trading range.
Through the lens of technical analysis, this should remain a positive move.
Zooming in on the daily chart, we see that the rally over the past 10 months or so has largely taken place in a well-defined uptrending channel (purple-dotted parallels).
Most recently, from mid-January to the second half of April, Netflix stock settled into a smaller trading range, where it trotted sideways. This range finally resolved after the earnings report from April 17; yesterday’s 3.36% rally in the stock was just a continuation of this post-earnings rally.
Considering the broader market’s eerily quiet volatility and seemingly insatiable appetite for “new technology” companies like Netflix, NFLX stock does look to have near-term upside into $170 before bumping into the upper end of the aforementioned channel once more.
However, traders looking to participate in this momentum trade will want to respect any bearish reversal on a daily closing basis. That way, they won’t get chopped up.
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