Chart Of The Day: Netflix Shares Have Entered A Bear Market; Is The Slump Over?

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Streaming entertainment giant Netflix (NASDAQ: NFLX ) is scheduled to report Q4 2021 earnings today, after the bell. Analysts are forecasting an $0.84 EPS versus last year's $1.36 on $7.71 billion in revenue, up from $7.48 billion YoY.

After the company's record 2021, with NFLX shares closing at an all-time high of $691.69 on Nov. 17, the stock's recent decline amid the ongoing restructuring of the Fed's monetary policy renders the stock's valuation overpriced. Plus, the company also has to contend with growing competition from a variety of peer streaming services which could severely undercut customer growth—which had already contracted during the first half of 2021.

Given the most recent pressures on the company, shares have been heading lower. The stock entered into a bear market on Jan. 7, closing more than 20% from its Nov. 17 record close. As of Wednesday's close it's down 25.4% from its peak.

And ominously, ahead of today's report, the pattern developing could suggest more selloffs ahead.

NFLX Weekly

The stock is slumping for a third straight week, heading toward the same lows it reached in September. When both the highs and lows of an asset's price fail to reach higher highs and higher lows, it's a clear sign of weakness. The current pattern development, according to technical analysis principles is an H&S top on the weekly chart—and a huge one at that, going back to July 2021.

The price has found support by the 100 WMA after falling below the 50 WMA. NFLX could bounce off the presumed neckline to form the right shoulder and still extend the decline in upcoming weeks or even months.

Then again, the stock could continue falling now as well. Although, after such a sharp decline, it's more likely to range in the formation of the remainder of the potential H&S top.

Trading Strategies

Conservative traders should wait for a decisive penetration of the slightly rising trend line making up the potential neckline before shorting.

Moderate traders would short a return toward $600 with evidence of supply.

Aggressive traders could enter a long contrarian position, counting on a rebound off the neckline, before joining moderate traders with a short. Money management is key. Here's an example:

Trade Sample – Aggressive Long Position

  • Entry: $505
  • Stop-Loss: $495
  • Risk: $10
  • Target: $555
  • Reward; $50
  • Risk-Reward-Ratio: 1:5

Author's Note: We are not in the fortune-telling business and can't predict the future. Rather, we use technical analysis to form a prognosis based on our interpretation of historical data. Trading is nothing more than "luck management," with traders attempting to get on the side of statistics for overall profitability, not necessarily from any individual trade. To succeed at trading one must learn to draw a plan specific to one's budget, timing, and temperament. Till a novice trader knows how to do that, follow our samples for educational purposes, not for profit at first. Otherwise losses could follow. Guaranteed. And there's no money back.

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