Chart of the week: time to fade out Netflix?

Netflix has been a blockbuster stock, but technical analyst John Burford asks if now is time to sell.

One of the few beneficiaries of the global lockdowns is undoubtedly Netflix (NASDAQ:NFLX) – the giant leader in the subscription movie streaming sector.

But with competition from rivals including Disney (NYSE:DIS) and many others heating up, can it maintain its huge growth rate?

To catch the eyes of today’s mostly younger audiences, it has needed to spend big on its own productions where production values are on a par with the established big-budget Hollywood studio features.

But what has caught my eye are the price charts. The shares have been a major winner for the early birds, but I am asking if this is a great opportunity to take profits.

Source: interactive investor. Past performance is not a guide to future performance.

Here is the chart going back to 2014 when the shares were trading around $40. The entire advance has a clear five-wave form with wave 4 being a complex 5-wave pattern.

It is clear that the rally remained uninterrupted until it reached the wave 3 high at $422 in June 2018 for a tidy gain of a cool 900% in only four years. As they say, that beats the building society.

But since then, they have gone just about nowhere, despite reporting massive subscriber numbers. As I mentioned above, this has come at a massive cost of escalating production expenses – and huge debt loads. So is the market getting wind that its business model can no longer sustain such a heady share price?

The final wave 5 in the above chart has taken the shares to a new all-time high, but at the current market, they are only a few dollars above the 2018 ATH. That is not the sign of a strong bull market.

For more clues, here is the close-up of the wave 5.

Source: interactive investor. Past performance is not a guide to future performance.

And it too has a five-wave form. Remember, a major advance that occurs in five waves is complete when the fifth wave completes and then the trend reverses.

The latest results were released on 21 April and showed subscriptions were indeed booming. But note the market reaction – it rallied hard to a high of $485 and then plunged to unchanged on the day to create a spike which is a typical end to a strong bull run.

To me, that looks like a buying climax, when there were no more buyers left to buy and the sellers started taking over.

If my analysis is correct, the shares should decline from around here and my first major target is the $300 region with lower potential.

To those investors holding the shares, it appears prudent to take profits. And for swing traders, taking a short position around here should pay off.

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John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.