Netflix Hits All-time Highs, Now What?

I realized yesterday that I've been a Netflix subscriber for almost 12 years. And these days I find myself using the service more than I use Cable and the DVD player combined, easily. I must not be the only one who likes the product as prices are hit all-time highs on Thursday. It certainly has been fascinating to watch over the past decade.

So now what? Do we buy the stock now? Sell it and take the profit? Just sit tight and watch it? This is the real dilemma. I'll start with this: $NFLX stock is not in a downtrend. So we know that right off the bat. And for now, I think we can continue to give the bulls the benefit of the doubt, from a structural perspective, until those 2011 highs are taken out to the downside. These higher lows and higher highs should not be fought.

So let's look a little bit closer. This is a weekly candlestick chart going back to 2009. The first thing I'd like to point out is the bullish divergence in Momentum at those 2012 lows. Notice how we made new lows (shaded circle) and quickly recovered to get back above the November 2011 lows while momentum was positively diverging putting in that higher low. The "false breakdown", if you will, is one of my favorite trade setups in the marketplace. Look at the results and you can see why.

Now that we're above the 2011 highs, we are in uncharted territory. After such a massive move this week, the bulls are clearly still in control. The one thing I don't like is how the relative strength is running into 2011 highs (lower plot). I also don't like momentum currently diverging and not yet confirming these new highs. I'm being picky here because these can easily resolve themselves over the next week. And at the end of the day, prices are at all-time highs and that's the only thing that pays us.

Here is a much closer look. This is a daily candlestick chart showing how we're running into the levels in October where prices quickly backed up. The sellers showed up right around here so I think it would be very constructive if prices just hung out up here. We don't even need to continue higher to confirm. I think it would be very positive for the stock if it can just hold up near the 390s.

Short term there is probably risk down to the 50 day moving average. The 350-360 level seems like a good entry point from a risk/reward perspective. But truthfully, if prices can hang out above those December highs for a few more days, we can use this 390ish area as a place to put a sell stop loss at some point in the near future.

This is not an easy name to trade. There's a lot of volatility, as you can see in these charts. So remember, you don't have to trade it. You can be a spectator and there's nothing wrong with that. So ask yourself, what's your time horizon, what's your risk tolerance, what's your goal in this marketplace? Does this stock fit those parameters?

Tags: $NFLX