Netflix Shares Set For a Correction

 | Mar 22, 2018 | 7:02 AM EDT
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Netflix, Inc. (NFLX) has seen its underlying technical picture weaken over the past two months. Prices have more than tripled in the past two years and now traders will need to adjust to a new environment, in my opinion.

Let's look at the charts and indicators to see how much of a correction we could be in for in the weeks and months ahead.

In this daily bar chart of NFLX, below, we can see that prices are still well above the rising 50-day moving average line and the rising 200-day line. Moving averages are lagging indicators so it will be awhile before the slopes of these averages turn negative.

The volume of trading (the histogram right below the price chart) shows heavier volume since the middle of January, telling us that we have a lot of new longs who could quickly be holding underwater positions.

The daily On-Balance-Volume (OBV) line made a high in late January and weakened in February when prices surged towards $300 telling us that sellers were actually more aggressive into the rally.

The OBV line made a slight new high in early March but has turned down again. Now look at the 12-day price momentum study in the lower panel. Momentum weakens from late January to early March even though prices make higher highs - a bearish divergence and a warning that the rally is slowing.

In this weekly bar chart of NFLX, below, we can see that prices are above the rising 40-week moving average line - perhaps too far above the line. The weekly OBV line has been rising slowly since early 2016 but it shows a down tick this month. The weekly Moving Average Convergence Divergence (MACD) oscillator has begun to narrow. A crossover will be a "take profits" sell signal.

In this Point and Figure chart of NFLX, below, we can see a small distribution (selling) pattern and a downside price target of $284. A decline to $284 will probably mean that the 50-day moving average line will be tested and/or broken.

Bottom line: A price of $330 for NFLX probably priced in a lot of good news and now the marketplace needs to adjust. The $285-$255 area was prior resistance on the way up and now I would look for it to provide some support on the way down but remember there is no guarantee that traders will indeed act as buyers there.

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