NFLX Trade

I entered NFLX today at $186.11. Here is what I wrote to trade report members:

My watchlist is rather small right now and there aren’t any good entries, so I’m going to take this opportunity to analyze a focus list stock that is not an easy sell as a long or short right now, NFLX.

NFLX has been a 2010 juggernaut momentum stock. It’s been the textbook trend pullback trade. In 2010 there have been at least eight good opportunities to enter, and I, along with many of you, have traded the stock successfully. There is another pullback that normally would be a good entry, however there is a key difference in this pullback whencompared to the others—volume.

Take a look at the enclosed chart. Each arrow signifies a pullback buying opportunity that was successful. Notice that the volume pattern in each of these instances shows higher gray bars than red bars. This tells us that the stock was being accumulated. The pullbacks were natural profit taking that occurs in all uptrends.

Now take a look at the current pullback. The red bars are nearly as high as the gray bars, and there are more than one. This is a concern. There are signs of distribution. Now this does not mean the stock is definitely going to fall here. However, it needs to be noted. There is a less of an “edge” to entry here. Many times there will be one more boost higher before a big fall. So keep this in mind. If a major support area breaks, be ready for entry.

Because we focus on risk/reward ratios, it’s still okay to enter long. If we take a small loss, that’s fine as long as we continually take 2:1 or 3:1 trades. When I see distribution starting to settle in, I like to get closer to 3:1 because the probability of a successful trade decreases.

If entering here, around $185-186, the natural target and stops based on support and resistance would be 179 and 205. That gives us the 3:1 risk reward we need for this setup.

I just entered at $186.11. Remember, you have to be willing to embrace a small loss here. We are looking at long term gain, not the result of one trade or the short term win/loss record.


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