Does This Bullish Pattern Indicate A Major Reversal For Netflix Shares?

Netflix, Inc NFLX was trading slightly higher on Tuesday, showing relative strength in comparison to the general markets, which saw the S&P 500 consolidating with an inside bar pattern on the daily chart.

On Friday, Netflix broke up from the neckline of an inverted head-and-shoulders pattern, which may indicate the bottom is at least temporarily in for the stock.

An inverted head-and-shoulder pattern can be either a powerful reversal indicator when found at the bottom of a downtrend or a continuation pattern found in an uptrend.

The pattern is formed when a security forms a rounded or V-shaped trough and then rises (right shoulder) followed by a second deeper downturn and accompanying rise (head) and then by a third trough and rise that is shallower than the second (left shoulder).

The inverted head-and-shoulder pattern has a neckline, which is drawn using a straight ascending, descending or horizontal trendline across the peaks in the pattern.

When the security breaks up through the neckline on higher-than-average volume, it indicates the pattern was recognized and a rally may follow.

Aggressive bullish traders may choose to enter a security in a head-and-shoulders pattern on the rise following the third trough, with a stop below the lowest price in the trough. More conservative traders may wait to enter a position on a break up from the neckline.
Bearish traders may wait to enter into a position if the security falls below the lowest price within the second trough, which negates the bullish head-and-shoulders pattern and indicates an accelerated move to the downside may follow.

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The Netflix Chart: Netflix formed the possible head-and-shoulders pattern between April 26 and May 26, with the left shoulder created over the first seven trading days within the time period, the head over the subsequent eight days and the right shoulder was printed over the eight days that followed. On Tuesday, Netflix retraced slightly lower to back test the neckline of the pattern and held above it.

Netflix’s relative strength index (RSI) has been making a series of higher highs and higher lows, which indicates momentum into the stock is increasing. Netflix’s RSI is currently measuring in at about 43%, which indicates the stock has room to move in either direction before entering into oversold or overbought territory but the indicator is suggesting more upside.
Netflix is trading in a confirmed uptrend, with the most recent higher high printed on Tuesday at the high-of-day and the most recent higher low formed at the $177.17 mark on May 24. Eventually, Netflix will retrace to print another higher low, which could provide an entry point for bullish traders who aren’t already in a position.
Netflix has two gaps above, with the closest gap falling between $248.70 and $333.22. Gaps on charts fill about 90% of the time, which indicates Netflix will rise up to fill the empty trading range in the future, although it could be some time before that happens.
Netflix has resistance above at $200.82 and $212.98 and support below at $186.40 and $178.38.