The trading week ending Jan. 26 saw a roughly 24% rally in shares of Netflix, Inc. (NASDAQ:NFLX) following the company’s latest earnings report. This now brings the year-to-date rally for NFLX stock to 43%, which comes on top of a roughly 55% rally in 2017. Although Netflix remains an impressive growth story that I for one would not want to bet against in the longer term, in the near-term, its stock price has very simply gone parabolic and that is not sustainable.
Last week’s rally brought about two two unprecedented things for NFLX stock: The longest weekly candle ever and new all-time overbought momentum readings by a mile.
Before digging into the charts, when I discussed NFLX stock last week on Jan. 23 I offered an initial warning that the stock should not be chased higher near-term, although it remains a great longer-term holding. Specifically I offered the following:
“For nearer-term swing traders and active investors who are long NFLX stock at least some partial profit taking is likely a wise decision. For more aggressive traders upon signs of exhaustion may provide an opportunity to buy some puts or put spreads or even outright short the stock for a trade toward a fist downside target of about 7%.”
So far the stock has not yet shown any actual price reversal, which is to say a near-term shorting or put buying opportunity has in my eyes not yet set up.
NFLX Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the longer-term weekly chart, note last week’s massively impressive long green candle, the longest one in the stock’s history.
Scarier still is that this longest ever candle is printing at the top of an already steep 12-month run. Technical analysis 101 labels this a classic parabolic chart that offers awful reward to risk for new long positions through a multi-week/month lens at this juncture.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, NFLX stock since my take last week has reached even steeper overbought readings and the daily MACD oscillator is nearly off the charts.
Again and to be clear, I am not here to make a bear case for NFLX stock structurally or fundamentally. I am merely pointing out that the reward-to-risk on the long side of the stock in the near-term are awful. The next bearish reversal (failed intraday rally) could offer an opportunity for aggressive and quicker traders and active investors to play the stock to the downside for a 7% – 10% move lower.
Check out Serge’s Daily Market Outlook for Jan. 29.
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