It’s that time again. We’re going to see what the effectiveness of Gould’s Speed Resistance Lines (SRL) is in predicting the downside for Netflix (NFLX). But first we’re going to review the last time that we ran an SRL on Netflix. The very first time we ran numbers on NFLX was on December 3, 2010 when the stock was trading at the pre-split price of $185.45.
At the time, we were testing out the quality of Gould’s work. We came up with a conservative downside target of $117.76 and an extreme downside target of $68.63. The most challenging part of the assessment was the fact that Netflix increased +50% before achieving the first downside target.
A follow-up review of the SRL on Netflix was done on September 22, 2011 where we had the following to say:
“…in reviewing the chart pattern of Netflix (NFLX), we have the peak of NFLX at $298.73. The conservative estimate for the stock is that it would fall to $148 which has already taken place. The extreme downside target would be $99.58. Because of the nature of the rise, we believe that Netflix (NFLX) is slated to fall at least to the $99.58 level.”
At the time, we proposed that NFLX would decline at least -66% from the peak of $298.73. The actual decline was -79.89%. Will it happen again? We don’t know. However, if it does, there will be good buying opportunities ahead.
In the above chart, we have listed the three downside targets based on the work if Edson Gould at $88.76, $65.93 and $43.10. Netflix is already on the ropes and looking to achieve the conservative downside target of $88.76. The nearly parabolic nature of the price rise after January 2015 indicates that there is a good chance at achieving the extreme downside target of $43.10.
First things first, NFLX needs to decline below the $88.76 level. Once declining below the conservative downside target, we can reasonably expect the stock to fall to the $65.93 level before some sort of move to the upside. Given that Netflix increased +50% before achieving the first downside target a year after the 2010 , we’ll have to wait and see how this plays out.