Netflix, Inc. (NFLX) stock set its all-time intraday high of $392.95 on Feb. 19 and then traded as low as $290.25 on March 17. This put the stock into correction territory at 15.3% below the high.
The stock fell below its annual pivot at $314.45 on recent weakness but stayed well above its March monthly value level at $275.60. The stock is well below its semiannual risky level at $381.22 and is back above its annual pivot at $314.45.
The annual pivot at $314.45 will likely remain a magnet, as should the 200-day simple moving average (SMA) at $322.47. The annual pivot at $314.45 should be the low end of a trading range, with the semiannual risky level at $381.22 at the upper end. These key levels will not change as the calendar turns over into April. However, in April, we will have new monthly and quarterly levels that will hone into new trading scenarios.
Netflix has beaten earnings per share (EPS) estimates in eight consecutive quarters, and despite the negative impact of the spreading of COVID-19, consumers will watch more TV, which helps online streaming services. Netflix stock is not cheap. Its P/E ratio is 80.39, and the company does not offer a dividend, according to Macrotrends.
The daily chart for Netflix
The daily chart for Netflix shows a 52-week trading range. The lower end is its monthly value level at $275.60. The upper end is the semiannual risky level at $381.22. In between is the annual pivot at $314.45, which should remain a magnet. These are the three horizontal lines on the daily chart.
The 52-week volatility shown on the chart suggests that the trading range will remains the play. In a trading range environment, "golden cross" and "death cross" formations should be ignored.
The chart shows the bear market decline from the high posted on May 1, 2019, to the low reached on Sep. 14, 2019, as well as the bull market from the low posted on Sep. 14, 2019, to the Feb. 19 high. The three horizontal lines from bottom to top are the monthly value level at $275.60, the annual pivot at $314.45, and the semiannual risky level at $381.22.
The weekly chart for Netflix
The weekly chart for Netflix is negative, with the stock below its five-week modified moving average of $350.16. The stock is well above its 200-week SMA, or "reversion to the mean," at $249.32.
The 12 x 3 x 3 weekly slow stochastic reading ended last week declining to 67.92, now below the overbought threshold of 80.00 on a scale of 00.00 to 100.00. Note that, at the Sep. 2019 low, the stochastic reading was 9.63, below the 10.00 threshold that defines a stock as technically "too cheap to ignore."
Trading strategy: Buy Netflix shares on weakness to the annual value level at $314.45 and reduce holdings on strength to the semiannual risky level at $381.22.
How to use my value levels and risky levels: Stock closing prices on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual, and annual levels remain on the charts. Each calculation uses the last nine closes on these time horizons.
Monthly levels for March were established based upon the Feb. 28 closes. New weekly levels are calculated after the end of each week. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.