This Earnings Period Comes at a Crucial Time for Netflix

Netflix (NFLX) rallied strongly in the first half of 2023. Then it steadily retraced from July to mid-October.

The resumption of NFLX’s rally in October followed the streaming giant’s big Q3 earnings beat. It gapped almost 20% on the day.

Then NFLX gapped higher again – this time around 15% on the day – with its Q4 earnings beat in January this year.

But NFLX’s rally is now looking stretched. And it will announce Q1 earnings tomorrow.

So let’s check the chart to see how things might play out from here…

Bullish Signals Reversed

In the chart below, you can see NFLX’s rally up to its short-term peak in July (‘A’). NFLX then drifted lower before resuming its rally in mid-October.

This “rally, consolidate, rally again” pattern is typical of a bullish trend. And we can see it clearly in the actions of the longer-term 50-day Moving Average (MA, blue line).

Netflix (NFLX)

Source: eSignal

As we mentioned above, NFLX gapped higher in October off the back of its big Q3 earnings beat. That move coincided with a series of bullish technical signals:

1. The Relative Strength Index (RSI) rallied strongly from oversold territory and broke up through resistance (green line) into the upper half of its range. That’s where the RSI has remained since.

2. The 10-day MA (red line) crossed above the 50-day MA with both MAs strongly trending higher.

3. The blue MACD line crossed above the orange Signal line. It broke up through the zero line (0.00) and remained in its upper range.

But as NFLX continued to track higher in the first quarter of 2024 (upper orange line), several bullish signals started to reverse.

The RSI has steadily fallen from overbought territory (lower orange line) and recently tested support (red circle).

Take another look:

Netflix (NFLX)

Source: eSignal

And after peaking in February, the MACD line fell below the Signal line. Both began steadily tracking lower since then.

And although the 10-day MA is still bullishly tracking above the 50-day MA, they have started converging. The stock price recently closed just slightly above the 50-day MA.

The signals suggest NFLX is looking toppy. So with earnings due tomorrow, how should we approach things from here?

A Clear Break Lower

The most immediate thing I’ll watch after earnings is what happens with the RSI.

If it continues below support (green line) and gains traction in its lower band, that could set NFLX for a pullback.

A sustained move in the lower half of its range could see NFLX make a clear break below the $600 level.

I’ll also see if the MACD line keeps tracking lower (pulling the Signal line with it). A move below the zero line would be further confirmation of any emerging down move.

Beyond that, the longer-term action of the MAs will be key.

The 10-day MA breaking and accelerating below the 50-day MA would provide the setup for NFLX to make a sustained move down.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict