Netflix (NFLX - Get Report) shares are at oversold levels on several indicators not seen since their highs of August and December of 2015, which were intermediate-term tops that were followed by significant percentage price declines.
The idea of shorting this particular stock seems counterintuitive, but at its current level it is setting up as a good risk/reward speculative trade.
The daily chart has the 2015 highs and the current trading period highlighted in the shaded areas and illustrates the overbought indications.
Moving average convergence/divergence is constructed to show the point difference between the component 12- and 26-day exponential moving averages. The faster average is greater than the slower average by seven points, and while initially this wouldn't seem high for a stock of this price, it is the higher than the differences charted in August and December last year.
The relative strength index is in an overbought condition for the first time since August 2015, and while these two indications suggest the positive momentum is overdone by historic standards, they do not indicate when it will stop.
The first graph below the price chart represents the percent difference between the current price of the stock and the 50 day moving average of price. It shows a 22% deviation above the average, which is an all-time high reading. The Bollinger bandwidth indicator is the highest in the charted period and the "thumbnail zoom" on the right shows the stock price trading outside its upper band last week, or more than two standard deviations above its 20-day average.
These readings are based on different interpretations of different averages of the stock price, and so they do have an underlying correlation. But it is the actual price action over the last two sessions that adds an extra dimension to the analysis.
Two very distinct doji stars have formed on the chart. These candles have narrow opening and closing range "real bodies" and larger shadows or overall ranges. A close that returns to the location of the open reflects indecision and lack of commitment, or a stalemate between buyers and sellers. Dojis often mark turning points in a decline or a rally, but like all candles or candle formations, they require confirmation.
Netflix is a speculative short trade at its current level and offers a good risk/reward ratio because of the nearby initial buy-to-cover stop-loss level just above the doji high and the potential for a sizable pullback. It is a trade that requires a prudent position size and a disciplined stop designed for capital preservation.