Netflix was the top-performing stock in the entire S&P 500 in 2015, but it is off to a rocky start so far in 2016. But is Netflix’s recent sputter the beginning of a major breakdown or is it simply a consolidation period before the next leg higher? Here’s a look at the chart.
The bad news for Netflix bulls is that the stock appears to have formed a bearish head and shoulders pattern, seen in the chart below. The stock’s April highs didn’t eclipse its December highs and appear to have formed the first major “lower high” associated with the transition from an uptrend to a downtrend.
Admittedly, the head and shoulders formation is far from perfect. The left shoulder and right shoulder typically peak at around the same level, but Netflix’s recent highs were well short of its August high around $129. Regardless, the general idea that Netflix has now formed a lower peak is troubling for the stock’s outlook for the remainder of the year.
Netflix also still has a gap in its chart in the $70-75 rage that formed when the stock gapped up about a year ago. This gap has yet to be filled, which long-time chart technicians know could be a bearish sign. For Netflix to fill this gap, it would need to fall roughly another 25% from its current level.
For now, Netflix traders will be waiting and watching Netflix’s support levels for signs of a breakout.
In terms of support, February’s low of $80 is critical. Any argument that Netflix is just drifting sideways until the next leg up likely goes out the window if the stock makes its third consecutive lower low below $80. In addition, a move below $80 would make it highly likely that that the stock would push down to its next support level at around $70 and close that lingering gap.
Bulls looking for a breakout will first be watching the $112 level that served as resistance in April prior to the recent sell-off. While a move above $112 would be good news, until the stock breaches the $129 level of the left shoulder, the head and shoulder formation is still in play.
Netflix traders have a lot of things to watch in the stock’s chart in coming weeks. For now, the stock’s negative short-term momentum has it headed toward a test of $80 support. How the stock reacts to that level if/when it gets there will be a telling indication of where the stock may be headed next.
Disclosure: the author has no position in the stocks mentioned.
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