After a stellar decade-long run, 2022 saw the tides turn for Netflix Inc (NFLX)…

It had cratered almost 80% from its all-time high by the time it bottomed out and started to build a base in May last year — a brutal six-month fall.

Then NFLX began to steadily climb higher…

And after about a 135% rally off those lows, NFLX retraced again earlier this year. Last time we checked in late March, it was trying to regain momentum.

Now, NFLX is still trying to find direction. So, today, I want to see how things might play out from here…

Dismal Earnings

One of the major reasons for NFLX’s dramatic fall was a string of disappointing earnings results and negative forecast growth.

NFLX plunged by nearly 40% the day after the Q1 2022 earnings report broke.

Check it out in the chart below…

Netflix Inc (NFLX)

Source: eSignal

But as the Relative Strength Index (RSI) steadily ground higher from May to July, NFLX was able to build a base…

The RSI then broke through resistance and gained traction in the upper half of its band, pushing NFLX’s rally higher. And that’s where the RSI bullishly remained throughout the remainder of NFLX’s up move.

The other thing you’ll notice is the action of our two moving averages (MAs)…

The 10-day MA (red line) broke above the longer-term 50-day MA (blue line) in July, confirming NFLX’s emerging uptrend.

And that’s where the 10-day MA mostly stayed for the remainder of NFLX’s rally as the 50-day MA also trended higher.

However, NFLX rolled over in early February at ‘A’ in a common reversal pattern.

NFLX had been making higher highs while the RSI was making lower highs. We know when these two are diverging like this… a change of directions is in the cards.

Then, NFLX bottomed out at ‘B’… the RSI formed a ‘V’ and rallied from oversold territory (lower gray dashed line)… And dwindling momentum to a lower high at ‘C’ officially cut NFLX’s rally short.

Since then, NFLX has slowly drifted lower as the 50-day MA has rolled over and gently fallen. And the 10-day MA has also reversed and is closely tracking the 50-day MA.

So, what am I looking for around here?

Watch Out for False Signals

You can see two orange lines on the chart that form a closing (and symmetrical) triangle.

When you see a pattern like this where the swings are getting smaller, you know that both the buyers and sellers are losing conviction in their positions.

That’s why each swing becomes less pronounced as both the buyers and sellers abandon their positions earlier…

When this happens, you’ll notice the RSI will tend to fluctuate around support/resistance (green line) — as we can see here inside the red circle.

This is a tricky pattern. A stock could breakout in either direction when inside a symmetrical triangle setup like this (though nothing is guaranteed)…

But when it does finally break out, it often moves decisively.

The key is not to jump in on any breakout move too early…

Instead, it’s usually best to wait until the stock – NFLX, in this case – has closed above or below the triangle for at least one or two trading days.

Then use the RSI to gauge whether underlying momentum is supporting any breakout move.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict