Netflix, Inc. (NFLX) stock printed money for happy shareholders for more than two years, rising five-fold into June 2018's all-time high at $423.21. Most technicians assumed that the decline into August would signal another buying opportunity, but the correction picked up stream into late October, dumping to the lowest low since April. Ominously, price action into mid-November has drawn the right shoulder of a nine-month head and shoulders pattern, warning that a breakdown could target an equally destructive decline into 2019.

Fortunately, hypothetical targets and market reality are two different things, so a panicked exit may be premature. Even so, those still positioned in this former FAANG favorite need to shake off chronic complacency and pay closer attention to day-to-day price action, just in case the worst-case scenario plays out in coming months. That process starts with a deeper understanding of price levels getting tested during the current downturn.

NFLX Weekly Chart (2015 – 2018)

The stock found support at $80 in the first quarter of 2016, after topping out near $130 in August 2015, and eased into a narrow range pattern that exploded to the upside two weeks prior to the presidential election. The rally built on steady gains into January 2018 and went parabolic, more than doubling in price into the July top. The historic advance has left behind two unfilled gaps: October 2016 between $107 and $112, and January 2018 between $227 and $236.

The potential head and shoulders pattern draws the neckline between the .382 and .50 Fibonacci rally retracement level, but the .382 harmonic looks more instructive, with two reversals around that price zone and the psychological $300 level. Meanwhile, the height of the head (150-plus points) confirms extremely high risk, with the measured move target following a breakdown adding that number to the neckline at $270.

The weekly stochastics oscillator has reached but not penetrated the oversold zone, indicating that bears remain in firm control. The monthly indicator is also engaged in a full-scale sell cycle, dropping through the lower panel but still above the oversold zone. Unfortunately, this bearish weekly/monthly convergence adds to already high risk, predicting a selling wave that may or may not signal a corrective climax.

Fortunately for bulls, the on-balance volume (OBV) accumulation-distribution indicator is showing no signs of panic, hanging tough near the January 2018 level. Even so, the unfilled gap between $227 and $236 could act as a magnetic target, exposing another 30 to 40 points of short-term downside. Note how that level is still above the .618 rally retracement, which marks a common end point for intermediate corrections.

NFLX Daily Chart (2017 – 2018)

The rally wave from December 2017 to June 2018 adds detail to the broad brush weekly view, placing the head and shoulders neckline right at the .618 retracement level. In turn, this confirms the importance of support at $270 while warning that a breakdown will reach the .786 retracement, which has aligned perfectly with the January 2018 gap fill just below $230. Not surprisingly, this harmonic level traditionally signals the last line of defense during corrections and counter-waves.

A buying spike above the 50-day exponential moving average (EMA) and potential right shoulder at $330 is now needed to improve the bearish technical outlook and raise the odds for a larger-scale recovery wave. The $385 level will mark the next upside target if that happens, at the bottom of the July 16 breakaway gap. Unfortunately, a 35% rally will be required to reach that resistance level, highlighting the major challenge ahead for Netflix shareholders.

The Bottom Line

Netflix has completed a nine-month head and shoulders pattern, warning shareholders that additional downside is possible in the coming months.

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