Netflix's Bullish Engulfing Signals More Upside Ahead

Netflix, Inc. (NFLX) shares rose more than 8% this week, as of early trading on Tuesday, after the company announced that it would test ads for its original content in between episodes. While many users criticized the move on social media, the streaming giant noted that viewers would be able to "skip" the advertisements, and investors seemed to applaud the move as a way to increase revenue growth without hiking subscription fees.

The stock has been under pressure since late June and early July after Walmart Inc. (WMT) announced plans to launch its own streaming service aimed at "Middle America." At the same time, Netflix's international user growth suffered during the second quarter, which prompted Imperial Capital analysts to lower their price target to $494.00 – although that's still a hefty premium, and the analyst firm maintained its Outperform rating. (See also: Netflix Breakout May Boost Stock 11% Short Term.)

From a technical standpoint, the stock moved sharply lower over the past two months following a double top in late June and early August. The stock reached prior support levels on Monday, rebounded sharply higher, and created a bullish engulfing pattern. The relative strength index (RSI) rebounded toward neutral levels, while the moving average convergence divergence (MACD) could see a near-term bullish crossover.

Traders should watch for a move higher to retest prior reaction highs at around $355.00 before the stock experiences some consolidation. If the stock breaks out from pivot point and 50-day moving average levels at around $370.00, traders should watch for a move to retest prior highs of around $420.00. If the stock moves lower, traders could see a move to retest lows near S1 support and the 200-day moving average at $300.00. (For more, see: Why Bulls Say Worries About FAANG Stocks Valuations Are Overdone.)

Chart courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.