The last time we wrote about Netflix was on February 18th, 2016, while the stock was trading below $95 a share. The article was called “Netflix Bulls to Return Even Stronger”, because the Elliott Wave Principle suggested the stock’s uptrend is still not over and new all-time highs should be seen. The chart below shows why we were bullish on Netflix eleven months ago.
As visible, the chart made us think that the crash of over $53 a share from $133.27 to $79.95 was just wave (4) of a larger five-wave impulse. Since wave (5) was still missing, the stock was providing a great “buy the dip” opportunity. The company’s quarterly earnings did not matter, its declining or rising viewer base did not matter, and neither did takeover speculations. What did matter was the Wave analysis and it led us to the conclusion that Netflix stock should exceed the top of wave (3). Here is how things have been going since that forecast.
Last week, the bulls managed to reach $133.88, which is above the previous all-time high. With the help of Elliott Wave analysis, identifying Netflix’s upside potential was not that difficult as it would have been if we had to rely on news from the company. It allowed us to ignore all that noise and see the big picture clearly.
Unfortunately, no trend lasts forever. It looks like most of the rally is already behind us. Extrapolating the past into the future is the worst thing traders and investors could do. In our opinion, Netflix is not a good bet anymore, because every impulse is followed by a correction of three waves in the opposite direction. Besides, the relative strength index is flashing a strong bearish divergence between waves (3) and (5). If this is the correct count, the next couple of years might be disappointing for the entertainment giants’ shareholders. Once wave (5) is over, the anticipated three-wave retracement could drag the prices back down to the support area of wave (4) near $90 a share again. In other words, Netflix might lose over 30% of its market value. We would not like to be long, when it happens.