Netflix, Inc. (NFLX) shares sold off more than 5.5% in Wednesday's tech-driven rout, closing under the 50-day exponential moving average (EMA) for the first time since Aug. 28. More importantly, the decline ended a seven-week test at the psychological $200 level, with bears handily rejecting a concerted attempt to build new support. The sell-off posted nearly three times the stock's average daily volume, adding intensity to the turnaround.

This failure may signal the start of an intermediate correction that reaches the 200-day EMA, currently lifting into $170. That price level also marks support at a rising channel going back to April 2016. However, a strong bounce is likely before additional downside unfolds, with new resistance between $192 and $195 likely to trigger a reversal, making it a natural entry point for short sellers.

There is little or no risk that the longer-term uptrend will come under pressure despite the correction, because that would require downside through the January 2017 breakout above $130. However, the stock has not touched the 200-day EMA since October 2016, raising the odds that mean reversion will soon take control and shake out the large population of complacent bulls who aren't prepared for a deep or sudden slide. (See also: Netflix Stock May Rebound 17%, Options Trades Indicate.)

NFLX Long-Term Chart (2002 – 2017)

 

The company came public at a split-adjusted $1.16 in May 2002 and entered an immediate decline that posted an all-time low at 35 cents the following October. It lifted to $5.68 at the start of 2004 and topped out, with that level marking long-term resistance into a 2009 breakout that gathered tremendous force, lifting into the mid-$40s in 2011. The stock turned sharply lower into 2012, testing new support for more than a year before bottoming out at a two-year low in August.

The subsequent uptick required another year to complete a round trip into the prior high, giving way to an immediate breakout that failed to generate buying momentum. It ground sideways on top of new support into the second quarter of 2015 and took off in a strong but short-lived rally that stalled near $130 in August. That marked the top, ahead of a volatile correction that found support in the low $80s in the first half of 2016.

The stock cleared resistance in January 2017, entering a strong uptrend that has posted gains in excess of 50% so far this year. The channeled advance reached $200 on Oct. 13, triggering an important test that ended with this week's decline into the $180s. The turnaround is barely visible on the long-term chart, highlighting bullish fervor that is unlikely to waver through a long-overdue pullback. (For more, see: If You Had Purchased $100 of Netflix in 2009.)

NFLX Short-Term Chart (2015 – 2017)

 

Price action into 2016 carved a bearish descending triangle that generated many topping calls, but the stock held firm through five tests in the lower $80s, establishing strong support. A slow-motion uptick off that level escalated in October, when it gapped up between $100 and $116.50, attracting the momentum crowd. The hole remains unfilled more than a year later, but given the market's long-observed tendency to fill all gaps, it could come into play some time in the future.

On-balance volume (OBV) adds a bearish note to this otherwise bullish analysis while raising the odds for greater downside in the coming weeks. It peaked in the first half of 2015, well ahead of price, and entered a distribution wave that ended in February 2016. Buying power since that time has failed to reach the prior high, even though the price is trading more than 50 points above its prior peak. This signals a bearish divergence, telling us that institutions are less committed than retail investors. (To learn more, see: Uncover Market Sentiment With On-Balance Volume.)

The Bottom Line

Netflix stock sold off more than 5.5% on Wednesday, dropping to a seven-week low while closing under the 50-day EMA for the first time since August. This price action could mark the opening shot in an intermediate correction that reaches $170. (For additional reading, check out: Apple Could Launch a Netflix Competitor in 2018: Analyst.)

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

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