Netflix Bulls Need to Hit the Pause Button

by Serge Berger | January 22, 2013 9:05 am

Momentum traders’ favorite Netflix (NASDAQ:NFLX[1]) had a big rally off its September lows, reaching a price target I discussed several weeks ago[2] in the process. But can the good times continue for NFLX bulls?

On Dec. 6, I discussed here how the stock price, based on a meaningful bullish outside day from Dec. 4, was torquing up to fill the big downside gap from much earlier in the year, on April 24. Last week the stock reached my ultimate price target near $102 and now looks a little tired in the immediate term.

For proof, let’s look at a few charts for perspective on where the stock currently sits and what the risk/reward for longs feels like.

This first chart shows the nice gap fill, which netted a cool 14% in three weeks.

NFLX -- Gap Gets Filled
Click to Enlarge

On the longer-term chart looking back to 2011, we see the big crumble in the stock during the second half of that year. Since late 2011, however, Netflix has been trading in a wide but defined range, which on the upper end bumps into the $120 mark. From this point of view the stock could well have more upside in coming months once near-term overbought conditions are worked off.

NFLX -- Longer Term
Click to Enlarge

On the closer-up chart looking back to the beginning of the latest sharp rally (October), note the almost 100% increase in the stock in just three and a half months. Given the inside day on Jan. 15, followed by follow-through selling the following trading day, it may be time for the stock to take a little breather. Next simple lateral support comes in near $89, which coincides with the stock’s 50-day simple moving average — about 10% lower from last Friday’s close.

NFLX -- Support
Click to Enlarge

On the momentum indicator charts where I display both Stochastics and the RSI index, I also see supportive signs that the stock may need to rest/correct in the near term before ultimately heading higher again. Both indicators failed to confirm the January rally in the stock — negative divergence between price and momentum — as they both topped in December.

NFLX -- Momentum
Click to Enlarge

In summary, Netflix stock could continue to lift higher in the coming months … once near-term overbought conditions are worked off. I’d be looking for a correction of up to 10% in the stock before the bulls get the ball again.

  1. NFLX:
  2. several weeks ago:

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