Netflix’s (NFLX) peak in July represented a nearly 70% rise from January. And it was a massive 200% gain from when the streaming giant’s rally began way back in May of last year.
But since hitting that high just over two months ago, NFLX has struggled to maintain momentum. And the stock has continued to slide.
Even a promising rally last month soon rolled over and headed south.
Yet now NFLX is about to test a key technical level. So today, I want to see if it can turn things around…
Flattening Out
In the chart below, the 50-day Moving Average (MA, blue line) shows NFLX’s long-term trend. You can see how that uptrend started flattening out around the start of August.
Netflix (NFLX)
Source: eSignal
Yet within NFLX’s rally, you’ll notice some decent-sized swings.
In a less volatile rally, the 10-day MA typically tracks steadily above the 50-day MA.
But with NFLX, the shorter-term 10-day MA (red line) has jumped all over the place and crossed the 50-day MA multiple times.
NFLX’s swings coincided with sharp changes in momentum as shown by the Relative Strength Index (RSI).
When we last checked in on NFLX in June (red arrow), it had strongly rallied, with the 10-day MA accelerating above the 50-day MA.
That move led to NFLX rising 40% in just a month and a half.
But that strong surge also put the RSI into overbought territory (upper gray dashed line).
As I wrote at the time, if the RSI dropped back toward support from its peak, then we could see NFLX trading back around $410.
As it turned out, that’s right near where NFLX’s retracement bottomed out ($412). From there, NFLX then rallied up to a fresh high on July 19.
But that coincided with the RSI making a lower high…
Take another look:
Netflix (NFLX)
Source: eSignal
When the stock price and RSI head in opposite ways (orange lines), a change of direction is often in the cards.
That pattern accelerated off the back of NFLX’s mixed earnings.
Despite decent earnings per share (EPS), revenue came in slightly lower than expected. It was low enough that those looking for an excuse to sell closed out of their long positions.
And after trying to rally again in August, declining momentum has continued to drag NFLX lower.
But the RSI recently touched oversold territory (lower gray dashed line). So now what am I looking for?
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We Need a Definitive Move
Just because the RSI shows a stock is oversold, there is no guarantee that it will bounce.
When the RSI tracked along the top of the oversold line back in late February through early March, NFLX continued to slide.
It only rallied when the RSI formed a “V” and turned back up toward resistance (green line).
That is what I’ll be watching for around here.
To see NFLX bounce, we’ll need to see a definitive move higher from the RSI. The RSI rising back up near resistance could soon put NFLX trading back around $410-$420.
Beyond that, we’d then look for the 10-day MA to start tracking up toward the 50-day MA as further confirmation of any developing up moves.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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