The American over-the-top content platform and production company headquartered in Los Gatos, California, Netflix Inc. (NASDAQ: NFLX) seems to have broken out and looks ready for an upmove in the short-term as per the latest charts. NFLX was one of the stocks on our watchlist in early January identified with breakout potential.
Bullish Move – Chart Indications
#1 Channel Breakout: As you can see from the daily chart, the stock has been forming a trend channel during the past several months. This is marked in pink color. The stock had typically taken support at the bottom of the channel before bouncing back. The stock has currently broken out of the trend channel, indicating possible bullishness.
Daily Chart – NFLX
#2 Price above MAs: The stock is currently above the 50-day SMA as well as the 200-day SMA, indicating that the bulls currently have an upper hand.
#3 MACD above Signal Line: In the daily chart, the MACD (light blue color) is currently above the MACD signal line (orange color). This indicates a possible bullish setup.
#4 Bullish ADX and DI: The ADX indicator shows bullishness because the (+DI) line, as well as the ADX line, are currently above the (-DI) line.
#5 Bullish Stoch: The %K line is above the %D line of the stochastic in the daily chart, and is also moving higher from oversold levels. All these indicate possible bullishness.
#6 Flag Pattern Breakout: As you can see from the weekly chart, the stock was in a strong uptrend after which it started consolidating and was in a narrow range. This is a classic flag pattern and is marked in the chart in purple color. A Flag is a continuation pattern. Whenever a stock breaks out of the flag pattern, it typically continues its previous trend (uptrend in this case). Currently, the stock has broken out of the flag pattern, indicating possible bullishness.
Weekly Chart – NFLX
#7 Bullish Stoch: The %K line is above the %D line of the stochastic in the weekly chart as well, indicating possible bullishness.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, you can purchase the shares of NFLX above yesterday’s close, which translates to a price of around $593.00. Alternatively, you can purchase the shares of NFLX if it corrects to the price of $565.00.
TP: Our target prices are $620 and $650 in the next 2 to 6 months.
SL: To limit risk, place a stop loss at $575.00 (for entry near $593) and $535.00 (for entry near $565). Note that the stop loss is on a closing basis.
Our target potential upside is 4% to 15% in the next 3-6 months.
- Entry near $565: For a risk of $30.00, our first target reward is $55.00 and the second target reward is $85.00. This is a nearly 1:2 and 1:3 risk-reward trade.
- Entry near $593: For a risk of $18.00, our first target reward is $27.00 and the second target reward is $57.00. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers 2x to 3x more potential upside than downside.
Risks to Consider
The stock may reverse its overall trend if it breaks down from the channel breakout level with high volume. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in the sector.
Happy Trading!
— Tara
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