Markets

Trade of the Day: Don’t Chase Netflix, Inc.

An image of a pair of glasses on a newspaper
Credit: Shutterstock photo

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Shares of Netflix, Inc. (NASDAQ: NFLX ) are higher by about 65% for the year to date already. The company seems to be an unstoppable growth machine, and that is something to like through the intermediate to longer term still. A growth stock, however, does not have to be chased higher and bought at any price. Currently Netflix stock once again looks overly extended for the near term.

Netflix Stock Faces Widening Competition Amid a Narrowing Moat

Source: Vivian D Nguyen via Flickr (Modified)

As I often point out to subscribers and coaching clients, when it comes to trading and investing it is all a question of time frames. One could be correct around a company's longer-term growth prospects, but the nearer-term price gyrations may be all over the place.

When I last discussed NFLX stock in this column on Jan. 29 I offered that it had reached historic overbought reading both in the near- and intermediate-term time frames. Specifically I wrote, "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."

Two days later, on Jan. 31, the stock had a bearish reversal and over the next few sessions corrected well more than 10%.

Netflix Stock Charts

Click to Enlarge

Moving averages legend: red - 200 week, blue - 100 week, yellow - 50 week

Before digging into the daily chart, let's note that although Netflix stock corrected along with the broader market in early February, on the weekly chart things remain overbought in a meaningful way. In the first half of 2018, NFLX stock started a vertical ascent, or 'parabolic move' in technical analysis jargon, that took it out of the longer-standing up-trend as marked with the black parallels.

The weekly MACD momentum oscillator at the bottom of the chart remains in uncharted territory (overbought). While I would not want to bet against NFLX stock structurally over the longer term, ultimately there is a decent chance the stock does undergo a better intermediate-term corrective move that gets the stock back into the low $200s. Active investors however would be wise not to put on any intermediate term bearish bets until notable bearish reversals appear on the weekly chart.

Click to Enlarge

Moving averages legend: red - 200 day, blue - 100 day, yellow - 50 day

On the daily chart, note that the approximately 17% corrective move in late-January / early February did act as a mean-reversion move of sorts and thus worked off the most severe overbought readings. The stock however quickly found support on Feb. 9 and pushed higher again, proofing that buyers were giddy to get after the stock.

While NFLX stock could still push somewhat higher in the immediate term, the reward to risk on the upside is getting notably weak again as overbought readings from just about any momentum oscillator on the daily chart is nearing extremes again.

Aggressive traders could once again look to short the NFLX stock upon any notable bearish reversal (similar to late January) back toward $280 while intermediate term holders of the stock would be wise to take some profits off the table.

Check out Anthony Mirhaydari's Daily Market Outlook for March 9.

Tell us what you think about this article! Drop us an email ateditor@investorplace.com,chat with us on Twitter at@InvestorPlaceorcomment on the post on Facebook. Read more about ourcomments policy here.

Take Serge's quiz to find out which trading strategy best suits your personality.

More From InvestorPlace

Compare Brokers

The post Trade of the Day: Don't Chase Netflix, Inc. appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

NFLX

Other Topics

Stocks

Latest Markets Videos

    InvestorPlace

    InvestorPlace is one of America’s largest, longest-standing independent financial research firms. Started over 40 years ago by a business visionary named Tom Phillips, we publish detailed research and recommendations for self-directed investors, financial advisors and money managers.

    Learn More