Netflix, Inc. (NFLX) Stock Fires a First Warning Sign

On Thursday, March 2, stocks gave up some of their initial exuberance that followed President Donald Trump’s Tuesday address to Congress. While the bulk of the weakness was seen in the financial sector and transportation stocks, some single-name stocks such as Netflix, Inc. (NASDAQ:NFLX) also exhibited some notable weakness. The action in NFLX stock in particular could lead to further weakness over the next few weeks.

Beat the Bell: Netflix, Inc. (NFLX)This should give traders and active investors something to sink their teeth into.

Before discussing the current trading setup I am eyeing in NFLX stock, I want to be crystal-clear: I believe in the Netflix business model, and the entire movement of online streaming.

This does not mean one can’t opportunistically trade around a core long position in this growth stock. After all, Netflix in the past has offered plenty of 20% to 40% pullbacks.

Tactically and strategically speaking, a swing trading approach overlaid on long-term holding positions, if done right, can not only generate additional cash flow in the position, but also lead to a lower average stock cost over time. This is accomplished by, among other things, lightening up on a stock as it reaches overbought extremes and building back up a full position as it reaches oversold readings.

When I last discussed Netflix stock on Feb. 7, I offered two ways to trade the stock (upon a breakout of the trading range). The price action from Thursday, March 2, has broken Netflix below initial support. The path of least resistance may be lower now.

NFLX Stock Charts

On the multiyear weekly chart, we see that NFLX largely traded in a wide sideways range from August 2015 until late December 2016.

NFLX stock chart weekly view
Click to Enlarge

In January 2017 following the latest quarterly financial results, the stock released higher and broke out of this trading range. This latest rally, however, likely extended the stock too far too fast above its various intermediate-term trendlines and moving averages, and also led to overbought readings on the momentum oscillators.

Like I often say, though, indicators alone are not enough to call for a correction or a rally in any given stock. Price action is the ultimate and only arbiter. And yesterday’s price action may have been the first proper near-term sell signal in NFLX stock.

Looking at the daily chart, we see that Netflix on Thursday snapped its 21-day simple moving average (yellow) for the first time since doing so in November 2016.

NFLX stock chart daily view

The move also pushed the stock out of an ever-tightening trading range from the past few weeks and now eyes a first downside target around the $133-$136 area, which is a confluence zone made up of the blue 50-day moving average and the lower third of the post earnings up-gap from Jan. 19.

Below there, NFLX could possibly target the $128-$130 area, which is former horizontal resistance as well as roughly where currently the 100-day moving average resides (purple).

Any bullish reversal off the aforementioned support area should be respected as possible stop-loss signals for traders looking to play a tactical short-side trade in NFLX stock.

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