When we look at stocks that continuously sell off when they hit a specific area, we call that “resistance”. But all that really means is that the market is suggesting there are more sellers than buyers near a given price. There is overhead supply of shares, for whatever the reason. We’re not interested in knowing why, we just want to know if there is resistance or not. In some cases, stocks will “break out” above that overhead resistance, proving to us mathematically that the overwhelming amount of sellers at that given area has now been absorbed by an overwhelming amount of buyers for the stock.
Sometimes prices take a while to break through resistance. But other times, they just gap up above it and go on to make much higher highs. We call that a gap and go. I think that’s what we have here in shares of Netflix.
First of all, here is the longer-term picture:
This to me looks like an upside resolution from an 18-month base. Remember this also comes within the context of a longer-term uptrend that cannot be denied. So if the market has taught us anything over the last 150 years is that stocks trend. Resolutions out of consolidations within uptrends should resolve higher. So it makes perfect sense.
Looking shorter-term, this is what I mean about the “gap and go”. Look at all of this overhead supply from the past 18 months near $130-133. The market here is suggesting that this has now been enough time to absorb all of the overhead supply from all of those sellers. The fact that prices are above resistance tells me that we want to be in the direction of the buyers. So if prices are above $133 we want to be buying all day with a target near $166.
This level represents the 161.8% extension of this 18-month range and markets historically rally towards these levels, and in many cases beyond. But for now, we’ll stick with that target and reevaluate at that point once we have more information. From a risk management standpoint, I see little reason to own this if we’re below those former highs from the past 18 months. I think the risk/reward is very well-defined here and in my opinion skewed very much in favor of the bulls.
Click Here to learn more about how to receive weekly updates on these charts.
This post originally appeared on Investopedia.com on 1/19/17