Netflix (NFLX) Could Rally Into Year End

Netflix, Inc. (NFLX) stock is trading above $500 for the first time since Nov. 6, the session before Pfizer Inc. (PFE) announced positive vaccine results and triggered a wholesale exodus out of 2020's biggest COVID-19 beneficiaries. A string of new lockdown orders and a subscription increase to a standard $13.99 per month are likely responsible for the sentiment change, with market players considering the positive impact to fourth quarter earnings.

Key Takeaways

  • Netflix stock is attracting buyers for the first time in a month.
  • This uptick could reach July range resistance, driven by positive seasonal tendencies.
  • Weakness could return in January 2021, bringing the long-term uptrend into doubt.

The first day of December also marks the start of window dressing season, when many fund managers will buy the year's top performers to "dress up" their annual reports to investors. Netflix stock hasn't budged since July but is maintaining a 56% year-to-date return, underpinned by strong subscriber growth as a result of the pandemic. It could end 2020 near the all-time high at $575, following a synergistic seasonal tendency for market leaders to surge into year end.

The stock sold off nearly 7% in October after the streaming giant missing third quarter subscriber estimates and lowered fourth quarter guidance. Many analysts lifted their price targets despite the report, satisfied that the volatile highs and lows of 2020 would ultimately translate into strong trendline growth. However, a few fund managers have walked away during the quarter, with Keith Meister, Andreas Halvorsen, and Stanley Druckenmiller closing or reducing positions.

Wall Street consensus on Netflix stock has deteriorated since the second quarter, with a "Moderate Buy" rating based upon 21 "Buy" and 5 "Hold" recommendations. More importantly, three analysts now recommend that shareholders close positions and move to the sidelines. Price targets currently range from a low of $235 to a Street-high $700, while the stock is set to open Wednesday's session about $77 below the median $580 target. There's plenty of upside potential in this configuration, but many investors may sit on their hands until it's easier to measure fourth quarter metrics.

Seasonality is a characteristic of a time series in which the data experiences regular and predictable changes that recur every calendar year. Any predictable fluctuation or pattern that recurs or repeats over a one-year period is said to be seasonal.

Netflix Daily Chart (2018 – 2020)

Chart showing the share price performance of Netflix, Inc. (NFLX)

A multi-year uptrend topped out at $423 in July 2018, giving way to a decline that ended at an 11-month low near $250 in December. The 2019 recovery wave stalled in the $380s in May, marking resistance into an April 2020 breakout. The stock tested that level into June and turned sharply higher, posting an all-time high less than one month later. The subsequent decline into the 50-day exponential moving average (EMA) completed the outline of a rectangle pattern that remains in force as we enter the last month of 2020.

The on-balance volume (OBV) accumulation-distribution indicator posted an all-time high in June 2018 and slumped to a 21-month low in September 2019. Buying power since that time has failed to mount either the 2018 or 2019 high, setting off a major bearish divergence that intensified into July 2020. This deficit is hanging like a dark cloud over the stock, but up to this point at least, it has had little impact on price action.

Finally, the monthly stochastic oscillator crossed into a sell cycle in September that predicts relative weakness through the first quarter of 2021. However, the weekly indicator has now entered a buy cycle, with the conflict favoring short-term strength into January. All in all, this looks like a perfect set-up for window dressing to take control and reward shareholders with a quick trip into resistance in the $570s.

Divergence occurs when an indicator and the price of an asset are heading in opposite directions. Negative divergence happens when the price of a security is in an uptrend and a major indicator – such as the moving average convergence divergence (MACD), price rate of change (ROC), or relative strength index (RSI) – heads downward.

The Bottom Line

Netflix stock closed above $500 for the first time in a month on Tuesday and could trade up to the July high prior to year end.

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

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