Streaming media giant Netflix, Inc. (NFLX) is poised for a major breakout. This was one of the few companies that thrived during the pandemic. With consumers stuck inside, streaming and new subscribers surged in 2020. But that growth began to slow near the end of the year. That's when investors got cautious on the stock and slowed down its rally.
Since July, shares have been bouncing between a key resistance level (in red) and a key support line (in green). Both of these key levels are narrowing in on each other, creating a classic wedge pattern at the start of 2021. Take a look:
The resistance level has been tested three times, making it a key level to watch. It has also been around for five months now, making this wedge pattern something that will be front-and-center for traders.
We want to see when the breakout occurs. That will pave the way for a quick move of 25%, which is the height of the pattern, added to a breakout point. And I'm expecting Netflix to break out higher, giving it a $685 price target, thanks to the shaded lines on the chart.
These lines are from the Relative Rotation Graph concept, which compares Netflix to the S&P 500. The Relative Rotation Graph, or RRG, combines the relative strength of the stock to the S&P 500 with momentum to create a unique view of the stock. It shows that stocks rotate from leading the overall market to weakening as the momentum slows and eventually lagging the market before improving as momentum picks back up to come back to leading the market once again. Stocks tend to rotate in that specific order: leading, weakening, lagging, and improving.
Right now, Netflix is in the lagging section of the chart, and it is expected to move to improving. As it does, that should help push the stock back up to $540 per share, near the resistance point. But as it turns to leading from there, that could push the shares beyond that key level and have the stock on its way to my $685 price target. Earnings next Tuesday could be the breaking point in this wedge pattern.
The Bottom Line
Netflix was one of the companies to benefit from the pandemic. But now investors are pausing on the rally as shares fall into a wedge pattern. After five months of consolidating, Netflix shares are on pace to break out in the coming weeks. The RRG gives us the expectation that Netflix can break out to the upside and hit a price target of $685 later this year.