The above chart shows the next year of trading in NFLX, as the pullback I noted previously occurred at point 2. NFLX rallied from the mid-January intraday low at $28.78 to reach a high of $38.83 in February (point 3).
The ten-day correction from this high held the 50% retracement support at point 4 before NFX once again turned higher. Investors could have raised their stop to just below the low at point 2 after NFLX peaked at point 3.
NFLX then accelerated to the upside, forming a double top just below the $50 level in April. By early May, the exponential moving average (EMA) had flattened out, suggesting that a deeper correction was possible.
This is when Fibonacci analysis can be very helpful in either determining a stop that would allow you to stay with a major trend, or in finding an entry level for new positions. If you take the rally from the lows at point 1 to the high at point 5, a stop under the 50% support level at $33.90 would have been appropriate.
NFLX slightly exceeded the 38.2% support on May 14 and then formed a series of higher lows. By late June, it was becoming more likely that the 38.2% support (point 6) would hold, and therefore, buying on pullbacks towards the 38.2% support level was warranted.
NFLX completed its flag formation (dashed lines), a classic continuation pattern, in September. The stock retested the breakout level on October 1 (point 7). This pullback held above the minor 50% support calculated from the early-September low to the late-September high.
NFLX made a convincing new closing high at $61.13 on November 18 (point 8) before starting a 20% correction that lasted until January 22, 2010. This correction held the 50% support (point 9) of the rally from the low at point 6 to the high at point 8. The 61.8% support was at $46.16 and a stop under this level would have been fine for either existing or new long positions established around the 50% support level.
Using Fibonacci Analysis in a Down Market