Netflix (NASDAQ:) is up 12% from its May 11 low. The streaming entertainment giant and leading member of the mega-cap group of FAANG stocks has seen a rebound amid the return of the tech sector rally.
So why are technology stocks rising again? The rise of COVID-19 cases worldwide, via the highly contagious Delta variant, is pushing countries to maintain or reverse social restrictions as pandemic-era fears escalate again. Remember that big tech companies were the darlings of the market during the height of the pandemic, with people stuck at home and dependent on their devices and apps for work, shopping and even play.
Netflix, whose subscriber growth slowed dramatically as countries reopened, is regaining popularity as markets anticipate a possible return to shelter. The tech chart shows investors may be leading the way in the potential re-acceleration of Netflix's user growth.
Stock fell yesterday. Supposedly it was a return move following the pennant breakout, bullish after the 8.9% jump in a six-day rally between the June 21 low and the June 29 high.
The decline recovered from its lows as it approached the pennant and closed above the top of the descending channel since its January 20 high. Note, however, that the RSI may be heading for a double top in its overbought state.
Yet traders could rely on the support of the breakaway, rising rift, which completed an island reversal (parallel blue lines).
The longer view tells a more nuanced story.
In this time frame, the RSI is far from overbought. Rather, it tests the top of its bearish channel, which led the actual for the price. The MACD, while a lagging indicator, has already delivered a bullish cross (although a more reliable one follows an oversold condition, stretching the indicator's moving averages, as it did in early and late 2019).
We also recognize the resistance offered by the top of the descending channel, forming a weekly shooting star, which would be complete by Friday's close. So even if the daily pennant fails, there is a much larger, 3-month bullish pattern, an H&S from mid-April to mid-June.
See how the H&S is interwoven with the bottom of a slightly ascending gutter (green). As long as the rising channel lasts, the price is believed to continue in the longer term pattern, rather than the more recent falling channel.
Trading Strategies
Conservative traders should wait for a corrective dip along the red channel. If the V&G neckline, which joins the bottom of the green channel, showed enough demand to create a base, they would occupy a long position.
Moderate traders can risk a long position if the price bounces off the flag and clears the bearish channel.
Aggressive traders can now go a long way if they see the bottom of the divide providing support.
Trade sample
Admission: $525
Stop Loss: $520
Risk: $5
Goal: $575
Reward: $50
Risk: Reward Ratio: 1:10
