When Buyers Balk at Higher Prices

In the huge tech meltdown last year, few stocks got hit as hard as Netflix (NFLX).

The streaming giant fell a massive 77%. Its stock price crashed from over $700 down to $163.

But NFLX gradually turned things around. And its share price steadily recovered.

By the time it peaked around the middle of this year, it had rallied almost 200% from its 2022 lows.

Then after drifting lower after that peak, NFLX recently rallied strongly again.

In the past month and a half, it has rocketed 40% higher. This puts the stock within a whisker of its yearly high (to date) back on July 19.

But now NFLX is in danger of overheating. So let’s see what’s coming next…

Fresh High

The 50-day moving average (MA, blue line) in the chart below shows that NFLX was already in an uptrend as we came into 2023.

It went through a brief sideways period in March and April. Then NFLX began to rally strongly again in May:

Netflix (NFLX)

Source: eSignal

You can see the strength of the May rally in the 10-day MA’s (red line) acceleration above the 50-day MA.

But that strong buying momentum also pushed the relative strength index (RSI) into overbought territory (upper gray dashed line). And NFLX briefly pulled back in June.

Yet then it went on to make a fresh high around the middle of July.

Despite NFLX making that higher high (left upper orange line), the RSI made lower highs. This showed declining momentum (left lower orange line).

This dropping momentum pulled NFLX down.

From there, NFLX’s emerging downtrend coincided with two bearish signals:

1. Apart from a brief rally in September, the RSI tracked mostly in its lower band.

2. The 10-day MA crossed beneath the 50-day MA. Both MAs also tracked lower (apart from a short switch in September).

Take another look:

Netflix (NFLX)

Source: eSignal

But another reversal was in the offing. This time, a converging pattern between the RSI and stock price (right orange lines) set NFLX up to bounce, and a new rally began.

NFLX gapped higher after posting strong subscriber growth in its Q3 earnings beat. That move pushed the RSI bullishly back into its upper band.

After a brief consolidation, NFLX burst higher again at the start of the month. Then the 10-day MA crossed sharply above the 50-day MA and accelerated higher.

So with the RSI in overbought territory (red circle) once again, what am I looking for next?

Nervous Sellers

After its big 40% run, NFLX has been struggling to break above $480.

When a stock tracks sideways after a big move, buyers are balking at bidding the price up any higher.

And sellers start to get nervous about giving up profits.

So in the short term, NFLX could be vulnerable to a correction.

From here, a sharp move lower in the RSI could quickly see NFLX trading back around $460.

But we should be patient and wait for the right signal. We need to see a clear momentum reversal before considering any short trade.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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