Netflix NFLX Challenges All Time Highs with Wedge and Divergences

Sep 5, 2013: 12:21 PM CST

Even if you don’t trade Netflix (NFLX), you’ll probably find it interesting that shares are challenging all-time highs into the impressive $300 per share level from 2011.

Let’s take a quick overview of the “Battle to Break $300” in spite of the Divergences and Bearish Rising Wedge Pattern in motion currently.

Here’s a Weekly View of the bigger picture for Netflix (NFLX) Shares:

NetFlix NFLX Weekly Chart Technical Analysis Trading Strategies Setups

A quick overview shows a challenge for dominance at the $300 per share prior high.  In 2011, a literal collapse of the stock occurred in part due to management missteps and increased competition in the online video streaming space.

While there are plenty of lessons to learn from the late 2011 collapse (and the 2013 recovery), let’s focus our attention now on the critical trading and investing inflection (decision) price point into $300.

A retest of a prior high in the context of an uptrend is indeed bullish, and a breakout to new all-time highs would likely generate additional attention – and buying pressure (money flow) – into the stock.

Traders should be prepared to trade bullishly in the event that a pro-trend breakout occurs.

However, let’s focus on two chart-based factors that should grab our attention while shares remain under this level – these bearish factors will be overruled with a breakout event.

We see the two negative divergences in volume and momentum (seen in various oscillators including the 3/10 MACD Momentum Oscillator) – both factors were present in 2011 ahead of the trend reversal to the downside.

While we can’t see it on the weekly chart, we’ll need to turn to the Daily then Intraday Chart to see a Bearish Rising Wedge or “Three Push” pattern playing out into this critical decision level.

Netflix NFLX Daily Chart Technical Analysis Trading Strategies Bull market trend flag bull flag retracement

The Daily Chart helps us see the persistent negative divergences – a non-confirmation – in Volume and Momentum (oscillator) against Price (the persistent uptrend).

Still, trends do have greater odds of continuation than of reversal, and we can see this in the strong upward action with the three pro-trend flag or retracement trading opportunities as shown with the blue trendlines.

The Hourly Chart allows us to step inside a possible “Bearish Rising Wedge” Pattern or at least a compression of rising trendlines:

Netflix NFLX Hourly Chart Intraday Trading Triangle Rectangle Bearish Rising Wedge Trendlines Strategies Analysis

As we studied recently with a great example in Hewlett-Packard (“HPQ and the Curious Case of the Bearish Rising Wedge”), we can see a similar but tighter recent compression of rising trendlines for shares of Netflix (NFLX).

Bearish Rising Wedge Patterns can be effective for trade or strategy planning depending on how price breaks beyond the trendlines.

At the moment, we see a slight upside breakthrough into the $300 per share key inflection point level, and a further breakout could continue the money flow into the stock.

Breakouts are often fueled by one side of the market being “squeezed” or forced out of positions, and an upside break would be propelled in part due to bears/short-sellers stopping out (a “short squeeze”).

However, a reversal lower against the $300 level and a breakdown under the lower rising trendline near $295 per share could generate an aggressive breakdown signal, forcing bulls/buyers out of their well-intentioned positions as emboldened short-sellers step in with aggressive downside positions.

Either way, continue watching real-time action relative to the critical $300 per share inflection point and try to be as unbiased as possible with respect to a potential ‘pro-trend breakout’ or ‘divergence plus reversal pattern’ downside inflection from $300 per share.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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Corey’s new book The Complete Trading Course (Wiley Finance) is now available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).

4 Comments

4 Responses to “Netflix NFLX Challenges All Time Highs with Wedge and Divergences”

  1. rofs Says:

    Interesting setup and analyses. I´m going to watch this battle between bears and bulls. I will go with the winners. And watch out for false breakouts.

  2. Corey Rosenbloom, CMT Says:

    Indeed! That's exactly the right way to look at it – objective and aware of the potential of a bull trap and reversal. Thank you for sharing!

  3. Friday links: investment policies | Abnormal Returns Says:

    […] Behold the crazy round-trip that is Netflix ($NFLX).  (Afraid to Trade) […]

  4. Quad10 Says:

    Possibly.. Things have changed at Netflix too. IMO, it has a much higher value proposition than it did last time. Now it is vision is much clearer and it is becoming a vertical powerhouse that is disrupting everything from movie houses to networks.

    Technically, $300 is a much higher bar and I would expect consolidation and flagging. I think the pain is greatest >$300 and anticipate a squeeze will be northbound.