Breaking good?

●Netflix rebounded to mid-January highs after post-earnings pullback

●Current consolidation pattern has possible bullish component

●October highs are next apparent resistance level


There’s talk, and then there’s action.

One reason many short-term traders use analysis that falls into either the “quantitative” or “technical” camps is because, in the simplest terms, price action represents what people are actually doing in the markets vs. what they’re talking about doing.

For example, if over the past two weeks a stock has gained 6% and has closed down only twice, you may be able to find plenty of people who will debate why the move is occurring, and whether it makes sense or not, but it’s impossible to argue against the fact that at least some market players are making bullish bets on the stock.

And if you can objectively define the price action, you can consult the historical record and see if there’s any consistent behavior that has followed similar episodes in the past.

Netflix (NFLX), 4/17/18–2/14/19. Netflix (NFLX) price chart. Upside bias within consolidation.

Source: Power E*TRADE

That’s a long introduction to the recent activity in Netflix (NFLX), which over the past month has formed what many chart traders would likely describe as an “ascending triangle” consolidation (chart above). All that means is that, unlike a more or less horizontal trading range, price makes a series of higher lows that result in the pattern’s up-sloping lower boundary.

Because any consolidation pattern typically represents a reduction in both volatility and trend direction, this type of price action presents the possibility of the return of both in the form of a high-momentum breakout move. The challenge is determining when, and which direction.

The typical interpretation of the pattern in the NFLX chart is that, barring other factors, price is more likely to break out of the upside of the consolidation than the downside because:

1. The pattern’s successively higher lows are evidence that buyers are coming in, slightly more aggressively (i.e., at higher prices), when prices dip.

2. Price is expected to exit the consolidation pattern in the same direction it entered it (in this case, up).

It sounds like a logical outlook (especially point 1), as long as you remember that there are almost always “other factors” to consider—company specific news, broad-market and sector trends, and so on.

In this case, one factor that won’t be in play for a while is earnings, which Netflix most recently announced on January 17. The report topped earnings estimates but missed on revenues, and the following chart shows NFLX pulled back for few days before turning up and forming the two slightly higher highs that form the top of the current consolidation. And despite the initially tepid response to the report, at least one investment bank reiterated its bullish outlook on NFLX in the aftermath of the announcement, arguing that consensus estimates were incorrectly factoring in a decline in operating margins.1

Whether the bank is right or wrong, one thing is indisputable: As of yesterday, traders had bid up NFLX shares back to where they were right before the January earnings release, and not too far below the early-October highs around $387.

You can’t neglect those “other factors,” but it’s important to know where traders are actually putting their money.

Finally, since we’re brushing up against the Hollywood beat, here’s a completely gratuitous bit of Tinseltown gossip: The eagerly awaited Breaking Bad movie may land on Netflix before it airs on AMC.2

Market Mover Update: As Dollar Tree (DLTR) has continued to consolidate near its recent highs, the March $87.50 put options have declined around 20% since February 5 (see “Discount store, options mark-up”).

Heads up, Monday is Presidents Day—US equity markets are closed, and futures trading is limited. Since 1971, the day before Presidents Day (today) has closed up less than 50% of the time. Check back on Tuesday morning for updates on the market’s post-Presidents Day tendencies.

Today’s numbers (all times ET): Import and Export Prices (8:30 a.m.), Industrial Production (9:15 a.m.), Consumer Sentiment (10 a.m.).

Today’s earnings include: American Axle (AXL), Dana Inc. (DAN), Deere (DE), Enbridge (ENB), Moody's (MCO), Newell Brands (NWL), PepsiCo (PEP), Yandex (YNDX).


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1 Netflix (NFLX) Consensus Margins Are Artificially Low – BofA. 1/29/19.

2 Deadline. Vince Gilligan’s ‘Breaking Bad’ Movie Headed To Netflix & AMC. 2/14/19.