Netflix (NFLX) rallied 135% off its 2022 lows. But it went through a major pullback in early February.

After dropping 25%, NFLX surged again but topped out at a lower high.

These moves were at the start of a converging triangle pattern (orange lines in the chart below) when we looked at NFLX back on May 11 (red arrow).

When a stock breaks out of this pattern, it can move strongly in either direction. So we needed to watch momentum to determine which direction it would move.

In the end, rising momentum saw NFLX break higher out of the triangle and rally strongly.

Now that rally has taken NFLX into overbought territory. And today, I want to see how things might play out from here…

A Triangle Pattern

The chart below shows the 50-day Moving Average (MA, blue line) with NFLX’s steady uptrend after it bottomed out in May last year.

The 10-day MA breaking above the 50-day MA confirmed that rally. Apart from a couple of minor crossovers, that’s where the 10-day MA remained until NFLX’s pullback in February…

Netflix (NFLX)

Source: eSignal

Throughout NFLX’s up-move, the Relative Strength Index (RSI) also bullishly remained in the upper half of its range (above the green line).

Then NFLX’s rally ended and retraced from “A” to “B” as the RSI reversed from overbought to oversold territory.

NFLX’s converging triangle then began to develop from “C” through “E” as the two MAs increasingly tracked more closely together.

And notice the action of the RSI…

The swings in the RSI (momentum) became smaller. That caused the RSI to track right along the top of support/resistance (green line).

Take another look:

Netflix (NFLX)

Source: eSignal

This reflects increasing fatigue for both buyers and sellers, leading to them abandoning their positions earlier.

The RSI then broke decisively higher in its upper range. And NFLX likewise broke out higher from its triangle and rallied.

The strength of that move saw NFLX gain 35% in just over a month.

Adding to the bullish sentiment, the 10-day MA also accelerated above the 50-day MA.

That buying momentum’s strength has pushed NFLX to its highest level since January 2022. But it also moved the RSI into overbought territory (red circle).

So what am I looking for around here?

Gathering Momentum

The RSI has recently made an inverse ‘V’ and is now tracking back down to the overbought line.

Although it’s still early days, if the RSI continues lower toward support, then NFLX’s pullback should gather momentum.

Such a move could soon see NFLX back around $410.

For any down move beyond that, we’ll need to see the RSI break back into the lower half of its band.

I’ll be watching our two MAs too. As I mentioned, the 10-day MA has been accelerating strongly above the 50-day MA.

If this reverses and the 10-day MA moves lower, then that would add weight to any emerging down move.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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