Will the Strong Performance in Netflix Continue?

During the first two trading days of the year, NFLX displayed a few positive technical developments.

To start, NFLX gapped up over its 50-day Simple Moving Average (50SMA) and closed above the psychologically important $200 level on the first trading day of 2018.

The 50SMA denotes the intermediate term trend based on its slope. Currently, the 50SMA continues to slope upwards over the long-term signifying an uptrend. Furthermore, with the move above $200 NFLX also simultaneously closed above its 50SMA confirming its strength.

At this point, we could see a pattern of three up days develop in the chart which would be constructive for the long-term price action but can lead to short-term pullback due to temporary overbought conditions.

If NFLX does follow-through and posts another higher high then we should see the Relative Strength Index (RSI) become overbought with a reading above 70. After a breakout, it is important to monitor if a stock prints a level over 70 on RSI as this is a key factor in assessing the underlying price strength in the move.

That is, RSI functions like an oscillator delineating overbought and oversold conditions. During a trending market, like the one that NFLX has been exhibiting for several years, the stock’s ability to continually reach overbought levels is a sign of strength that should be viewed as constructive.

Long-Term Perspective

However, as a legendary trader, Jesse Livermore advised: “nobody can catch all the fluctuations” in a stock or market so focus on the big picture, long-term trend as well.

From a weekly chart perspective, there are several positive developments.

First, the gap-up breakout move this week absorbed a period of consolidation since October 2017. Usually, strong trending markets make decisive, swift moves like this out of inevitable periods of consolidation.

Given the fractal nature of markets, it is encouraging to see the breakout on the daily chart begin to take effect on the weekly chart, the next higher timeframe. That is, the underlying move on the shorter time frame will often signal a change or continuation of trend direction before it is fully priced into the chart on the next higher time frame.

Sector Performance

From a macro perspective, the Consumer Discretionary sector ETF (XLY) has led other market sectors in its performance over the past few months. Below is the daily chart showing XLY’s complementary breakout strength to start 2018 as well. Moreover, XLY created and sustained very overbought levels while building its recent uptrend during the end of 2017 which again is a sign of strength.

Additionally, the relative strength performance between XLY and the S&P500 (SPX) has shown a complete reversal of the trend that complements the uptrend that began in late 2017 for a price as well.

Presently, we can observe how relative strength has regained new highs along with price acting as confirmatory evidence in the move higher.

Key Takeaways

In summary, if you are looking for outperformance from large-cap consumer discretionary names then NFLX could provide an opportunity to profit if its existing uptrend continues.

The fact that price has broken out to new highs quickly over the first two trading days of 2018 is a sign that market participants want to own NFLX and are comfortable holding a position over $200 a share.

Since its breakout NFLX is providing a few levels for traders to place stops depending on risk tolerance or system rules. For example, a break of the 50SMA or a close below the recent swing low around $180-185 would provide a reasonable point of exit that would invalidate the trade thesis.