Netflix, Inc. (NFLX) stock lifted off a five-week basing pattern in the $490s on Wednesday, jumping nearly 12% before closing the session less than 30 points below July 13's all-time high at $575. The buying spree marks an end to a correction that accelerated with a sell-the-news reaction to second quarter earnings on July 17. The stage is now set for a test of the high and possible resumption of the streaming giant's strong uptrend.

Key Takeaways

  • Netflix stock sold off in July after the streaming giant lowered third quarter new subscriber guidance.
  • The stock held technical levels during the brief correction and could now test the all-time high posted in July.
  • Accumulation readings are flashing major bearish divergences, failing to match strong price action.

Shareholders grew more defensive in July after the company warned about lower growth in the second half of 2020, posting third quarter new subscriber guidance of just 2.5 million. Some big investors sold the stock after the news, with hedge funds run by Stanley Druckenmiller and David Tepper decreasing position size. However, guidance looks conservative due to continued hibernation by older Americans who are less subscribed to the service than Millennials or Gen-Xers.

Wall Street consensus highlights growing conflict about the long-term outlook, with a "Moderate Buy" rating based upon 20 "Buy," 9 "Hold," and an out-sized 5 "Sell" recommendations. Price targets currently range from a low of just $220 to a Street-high $625, while Netflix opened Thursday's session about $18 above the median $519 target. These rankings seem chiseled in stone until the company delivers updated guidance or reports third quarter results on Oct. 14.

A profit warning occurs when a company advises shareholders and the public that its earnings results will not meet analyst expectations. A company generally issues a profit warning prior to the public announcement of its official earnings results.

Netflix Long-Term Chart (log scale) (2008 – 2020)

Long-term chart showing the share price performance of Netflix, Inc. (NFLX)
TradingView.com

The stock tested the 2004 high at $5.68 in April 2008 and sold off, and in October, it posted the second higher low since 2005. That set the stage for a 2009 breakout that lifted the stock into market leadership at the start of the new decade. The initial rally wave topped out at $43.54 in 2011, ahead of a deep dip that tested the breakout level successfully in 2012. It broke out once again in 2013, entering a rising channel that held intact for six years.

Price action settled into a broad consolidation in the third quarter of 2018, carving higher lows and horizontal highs into an April 2020 range breakout that reached 2018 resistance a few weeks later. It completed a breakout to new highs in June, posting July's all-time high at $575.37 ahead of the third quarter report. The selloff into August held within a small rising channel, indicating that the long-term uptrend remains fully intact.

Netflix Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of Netflix, Inc. (NFLX)
TradingView.com

The on-balance volume (OBV) accumulation-distribution indicator has carved a surprisingly weak pattern that could signal trouble for shareholders. OBV posted an all-time high in June 2018 and entered a distribution wave that ended at an 11-month low in December. Subsequent accumulation matched price action into April 2020, when the stock broke multiple resistance levels and traded to an all-time high. The indicator just "sat there" during this period, exhibiting little or no sustained buying interest.

This marks an extremely bearish divergence that often foretells a change in trend, but Netflix downside has been fully contained in recent months, bringing the indicator's reliability into question. It's possible that short selling was so intense in the first quarter that second quarter short covering doesn't reflect true buying power. In any case, it's something to watch in coming months, especially if OBV drops through the lower blue line.

On-balance volume (OBV) is a technical trading momentum indicator that uses volume flow to predict changes in stock price. Joseph Granville first developed the OBV metric in the 1963 book "Granville's New Key to Stock Market Profits." Granville believed that volume was the key force behind markets and designed OBV to project when major moves in the markets would occur based on volume changes.

The Bottom Line

Netflix shares charged higher on Wednesday and could now test the bull market high, but traders should keep one eye on accumulation readings, which have failed to match constructive price action.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.