Key Levels for Netflix Stock in the First Half of 2020

Netflix, Inc. (NFLX) stock closed 2019 at $323.5 and closed Jan. 10 at $329.05. The stock is in bull market territory at 42.3% above its Dec. 26, 2018 low of $231.23. The stock is also in correction territory at 14.8% below its 2019 high of $385.99 set on May 1.

In the longer term, shares of Netflix set their all-time intraday high of $423.20 back in June 2018. Competitive pressures from new streaming video services caused a bear market decline of 45% to the low of $231.23 posted on Dec. 26, 2018.

The stock market bulls say that we have been in a bull market since March 2009. However, when you look at the ups and downs of key stocks such as Netflix, there have been two bear markets and two bull markets since June 2018.

Netflix is consolidating the bear market mentioned above. From the Dec. 26 low of $231.23 to the high of $385.99 set on May 1, 2019, the bull market totaled 62%. From the May 1 high to the low of $252.28 recorded on Sep. 24, 2019, the decline was a 35% bear market. Finally, from the Sep. 24 low to the high reached on Jan. 9, 2020, the bull market gain is 36%.

The close of $323.57 on Dec. 31, 2019, was an important input to my proprietary analytics. The annual value level for all of 2020 is at $314.45. The semiannual risky level for the first half of 2020 is at $381.22. The first quarter risky level appears unreachable above the charts at $467.42. The monthly value level for January will likely not be tested at $261.50.

Netflix stock is not for value investors. Its P/E ratio is 107.24, and the company does not offer a dividend, according to Macrotrends. Netflix has beaten earnings per share (EPS) estimates for seven consecutive quarters, and its next earnings report is scheduled for Jan. 21.

The daily chart for Netflix

The daily chart for Netflix shows the bear market from the May 1 high to the Sep. 14 low and then the bull market from the from the Sep. 14 low to the Jan. 9 high. The three horizontal lines from bottom to top are the monthly value level at $261.50, the annual value level at $314.45, and the semiannual risky level at $381.22. It seems that the annual value level will be in play all year as a pivot or magnet.

The weekly chart for Netflix

The weekly chart for Netflix is positive but overbought, with the stock above its five-week modified moving average of $316.94. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $236.35.

The 12 x 3 x 3 weekly slow stochastic reading ended last week at 84.81, down from 85.13, with both readings above the overbought threshold of 80.00. Note that, at the September 2019 low, the stochastic reading was 9.63, below the 10.00 threshold defining a stock that is technically "too cheap to ignore."

When you have so much up and down volatility, it is helpful to look at Fibonacci retracement levels. This measure is down from the June 2018 high to the December 2018 low. Note that the 61.8% retracement at $349.61 was a magnet between January 2019 and July 2019. The 23.6% retracement at $276.32 was a support level between Sep. 20 and Oct. 25. The 50% retracement is $326.97, and the 38.2% retracement is $304.34.

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: The closing prices of stocks on Dec. 31, 2019, were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual, and annual levels. Each calculation uses the last nine closes in these time horizons. New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. 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 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 typically is 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.