- A break above the 50 day moving average does not necessarily indicate a buy.
- Have you checked the longer time frames for Netflix?
- Looking at multiple time frames will help you get an overall picture of the stock's current trend and where the stock could be headed.
Should you buy Netflix (NASDAQ:NFLX) or should you wait? You have done all the fundamental analysis, or maybe, you haven't. Maybe, you are a technical trader who looks at the daily chart to trade.
The 50 day moving average is talked about so frequently that I thought I would use it demonstrate a point. A common indication of a trend reversal is a break above the 50 day moving average. If you only look at the daily chart, you'd have been fooled into thinking the trend had changed multiple times.
Were you wrong in your observation? No. You did not completely analyze the situation. You used only one piece of the proverbial puzzle.
If I put up a weekly chart, your perception should change, or at least you should have an "ah ha" moment.
On the daily chart, what you thought were breakouts and trend reversals were nothing more than mean reversions on the weekly chart. All Netflix stock did was retest and hold below the 50 week moving average multiple times.
The monthly chart gives us an even higher level of analysis. As always, there are a variety of interpretations when looking at one time frame. This is what I see. I see that the uptrend is still intact. However, Netflix may continue to consolidate because the price moved faster than the moving average, so mean reversion may be occurring as well. Also, if the price moves quickly in a short time span, it will consolidate for an undetermined amount of time before making the next move higher if that is the tendency. (Think about the major market indices after Brexit and you will see what I mean.) In addition, the stock is consolidating at the important 50 percent Fibonacci retracement level. You just don't know where the stock may go even though it is above its moving average.
I could also look at a time frame below the daily, but that is just meant for fine tuning the entry to buy Netflix. This lower time frame will not be of much help unless the direction of the higher time frames is known. Unfortunately, this is where a majority of market participants miss the whole point of the multiple time frame analysis. They think that the smaller time frame actions will have an impact on the the larger time frames. It is the other way around. As John Carter, one of my favorite traders, says, "Don't anticipate, participate."
Looking at the respective time frames on one screen may prove difficult to grasp the overall picture.
Here is what you could do if your platform has the capability. You could load 3 to 5 time frames and look at them simultaneously to get the overall picture. Anything more is just overkill.
Now you can clearly see the entire picture of Netflix. What can you infer? Now that you have all the pieces, there should not be any interpretation.
The analysis should be similar to the following:
Based on the monthly chart, Netflix is consolidating above the 50 month average. The weekly chart tells us that Netflix has tried to continue higher but keeps failing at the 50 week average. The daily chart is showing numerous false breakouts to the upside. Even though I have provided a 4 hour chart as a way to get a better entry point,there is no need to even consider it because now you know that Netflix is consolidating because the weekly chart is not in alignment with the daily and monthly chart. Plus, you can clearly see on all time frames that price is waffling around the 50% monthly Fibonacci retracement. There is no telling what direction the stock may be headed.
Thus, Netflix is not indicating a clear buy just yet. Until the weekly aligns with the other time frames, there is no need to allocate capital to this stock.