Netflix, Inc. (NFLX) stock is trading higher by nearly 8% in Thursday's pre-market session after beating third quarter profit estimates by $0.04 per shares. Investors shook off a sharp reduction in fourth quarter guidance, choosing instead to focus on a 21.2% increase in year-over-year revenues. International subscriptions beat estimates, while domestic subs came up short, lowering anxiety about the flood of streaming alternatives set for release by Apple Inc. (AAPL), The Walt Disney Company (DIS), and other well-financed competitors.

The media giant now expects to earn $5.44 billion in fourth quarter revenues, a 2% reduction from previous guidance. However, Netflix dropped earnings per share (EPS) estimates by a hefty 40%, acknowledging that competition will generate a "modest headwind" into the new decade. Even so, shareholders breathed a sigh of relief because the metrics showed marked improvement over weak second quarter results while confirming that the company is ready to defend its market dominance.

Despite the uptick, it isn't wise to expect a quick run to new highs because technical damage in recent months has taken a major toll, dropping accumulation levels to two-year lows. Sidelined investors are unlikely to take the plunge and reload positions after this report, which confirms that subscriber growth has dropped substantially and that competition will take market share in coming years. The astronomic price-to-earnings (P/E) ratio above 100 will also discourage quick upside, suggesting that the stock will remain range bound for many months to come.

NFLX Long-Term Chart (2004 – 2019)

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

A strong uptrend ran out of steam at a split-adjusted $5.68 in the first quarter of 2004, giving way to a trading range that posted two higher lows through the 2008 economic collapse. This resilient price action set the stage for a 2009 breakout that attracted healthy buying interest, lifting the stock in a powerful trend advance that reached the mid-$40s in 2011. A sharp downturn into 2012 shook out weak hands, dumping more than 80% into the single digits.

The sell-off marked a historic buying opportunity, ahead of a quick round trip into the prior high. It broke out in the fourth quarter of 2013 and tested new support for more than a year before stair-stepping into the triple digits in the summer of 2015. A final rally impulse after the 2016 election posted an all-time high at $423.21 in June 2018, giving way to a steep correction that found support in the $230s at year end.

The stock has traded within 2018 levels throughout 2019, carving a trading range that looks benign on the long-term chart. However, selling pressure within the range has been unusually severe, reducing the sponsorship needed to support an uptrend in an expensive growth stock. In turn, this pattern could mark a pause in the relentless long-term uptrend or a long-term top that eventually yield much lower prices. 

The monthly stochastics oscillator crossed into a sell cycle from the overbought zone in May 2019, predicting six to nine months of relative weakness, and has now entered the oversold zone. It will take at least a week of sustained buying interest to generate a bullish crossover, suggesting that sellers could still prevail despite short-term euphoria. At a minimum, this headwind warns market players to act cautiously because a quick reversal is possible.

NFLX Short-Term Chart (2016 – 2019)

NFLX
 TradingView.Com

The on-balance volume (OBV) accumulation-distribution indicator confirms the wisdom of a cautious approach, dropping to a 20-month low in September 2019. It will take months to restore this lost sponsorship, predicting that the trading range will last well into 2020. A proportional bounce makes sense in this scenario, limiting upside to the narrow alignment between the bottom of July's unfilled gap and the .618 Fibonacci sell-off retracement level near $335.

If the upside plays out as expected, the bounce will end just 25 to 30 points above Thursday's opening print, generating adverse reward:risk for momentum buyers. A more conservative strategy will wait for a retracement into the declining 50-day exponential moving average (EMA) above $290, offering a lower-risk entry that can survive a trip into the red trendline. In either case, aggressive profits should be taken because there's little evidence that the stock has now entered a new uptrend.

The Bottom Line

Netflix has bounced off lows after an upbeat third quarter earnings report, but technical damage lowers odds for a rapid return to new highs.

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