Simple Trading Lessons from NFLX Recent Doubling in Price

Dec 22, 2010: 12:04 PM CST

Netflix (NFLX) has been showing up frequently on many trading radars, and for good reason – the stock has doubled from $100 to $200 from August to December, and it did so within a stable uptrending structure that allowed for low-risk entries – either from a retracement standpoint or a breakout move – into the persistent uptrend.

Let’s focus on that period of time to learn a few easy lessons on trading tactics during a stable uptrending move in a high-flying stock – lessons you can apply to the future when this situation repeats in another stock.

While there’s certainly additional/similar lessons to discuss in the broader context of the rally from $30 in early 2009 to $200 in December, I wanted to hyper-focus to highlight these concepts in terms of entries in the context of a higher timeframe powerful uptrending stock.

So the basic tactic for swing, position, or campaign trading a high-flying stock often comes down to the following strategies:

1.  Buying PULLBACKS to a rising EMA or rising price trendline

It’s better when a reversal candle – such as a doji or hammer – forms as close as possible to (let’s say) the rising 20 day EMA (green).

While it doesn’t always make a huge difference, there’s two ways to execute your position into the uptrend depending on your aggression level:

A)  Aggressive Traders will trust the power of the uptrend (supply/demand imbalance) and thus execute as close as possible when price tests the 20 EMA, placing and trailing a stop under the 50 EMA (blue)

B)  Conservative Traders will need a bit more proof, often in the form of price breaking above a typical reversal candle as price pushes up off the 20 EMA.

I labeled such Retracement Pullback trades with little green arrows under the rising EMAs – notice that price nips just under the 20 EMA at times, but then continues its rally.  That’s why you can’t enter and place a stop directly under the EMA – if you can handle the risk, you often get better results by trailing your stop a little lower, say under the 50 day EMA.

2.  Buying BREAKOUTS above declining price ‘flag’ trendlines

The alternate strategy – for more conservative or “Prove it to Me” traders – is to buy the official price BREAKOUT above a declining short-term trendline, as would be the case with a little Bull Flag pattern.

I labeled these also with green arrows showing the price breaking declining trendlines on little pullbacks.

The risk in this strategy is of course that price gaps up through the trendline, as was the case in late October and November, and thus you miss the elegant trade entry.

In other words, the price has moved up so quickly off rising EMA support so as to degrade the risk/reward relationship, eliminating the short-term edge in retracement entries.

While we don’t know that the pullback to the EMA will result in another upward move, we can be more confident that a price breakout above the falling trendline will more than not lead to higher prices.

The price you pay for this ‘confirming’ information is an entry that is much higher than the ‘elegant’ EMA entries and thus is farther from your logical stop-loss point which is often under the 50 EMA.

Price has a tendency to go through “Action/Re-action” cycles (swings) up and down in the direction of the dominant trend, which is why retracement strategies often do better – or at least traders feel better trading them – over the “buy breakout” strategy.

Remember, it’s not about predicting the future, but about finding a high-probability, low-risk entry with a logical stop and reasonably larger target to play for.

Campaign and Position Traders may not exit at all, and instead PYRAMID in to their positions in their portfolio on these entries and hold indefinitely until price breaks the 50 EMA or gives some other higher timeframe sell signal.

Swing Traders might ‘swing’ from the 20 day EMA to the upper Bollinger, or when a short-term sell signal (reversal candle outside the upper Bollinger, for example) would compel them to take profits on the upswing and then wait out the down-swing to buy-back at the NEXT pullback to support.

Of course, there’s much more to learn from this example, but take the time to study this chart, label logical entries for yourself, and use this as a reference to develop your own strategies for entries and trade management within the context of a powerful rising trend move in a leading stock.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

6 Comments

6 Responses to “Simple Trading Lessons from NFLX Recent Doubling in Price”

  1. Mahdi Ghias Says:

    Hi Corey

    Quick question. Is there a software that can scan for the Three Push Pattern?

  2. Corey Rosenbloom, CMT Says:

    Mahdi,

    Not that I know of – at least, not off the top of my head – for the Three-Push specifically.

    Check out FinViz.com for a few types of chart scanning for trendlines, triangles, etc. It's neat but doesn't do the Three Push (one of my favorite patterns).

  3. Gustavo Barbaro Says:

    Corey, please see this chart about NFLX.

    http://img593.imageshack.us/im

    There is a clear up trend channeling and always NFLX found support arround last highs values.

  4. Niftydirectt Says:

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  5. Tim Chen Says:

    I've been holding NFLX for quite a while now. I think it is a good time to enter for a quick swing trade.

  6. Chris Says:

    How do you feel about getting back into NFLX after its recent pullback?  Customers were upset with the price hike and the contract break with Starz resulted in a 10% drop, do you think these issues could be overblown: http://www.bestonlinebrokerage… ?