Netflix has been on quite a tear since they reported strong earnings in April trading higher by more than $200. But for short term traders who each day look to trade lower time frame trends NFLX offered a good short setup Friday morning. These are some factors I considered prior to sharing the setup in our morning meeting.
- Netflix had a huge blow off top the prior week moving up $60 in 1.25 trading days. Following that blow off top it trades $50 lower before starting to move high the prior few days. Typically, after a stock tops and trades lower it will begin to narrow its trading range without a major news catalyst.
- Oppenheimer released a research report offering an $800 target in the next 12-18 months. The report contained no new information and based its target on market share growth over the next five years. The larger the gap higher the more likely it would attract selling from those who bought the pull back from the blow off top.
- The market had a strong trend day on the prior trading day and the chances of a second consecutive trend higher was very unlikely so conditions were favorable to enter a short on a gap higher.
Ideally, for this type of setup one hopes that traders will bid the stock higher in the pre-market on the upgrade and offer a good
entry price in the pre-market or on a final spike higher just as the market opens. In this case NFLX spiked to 675 in the pre-market during our AM Meeting. After the market opened it dropped a few dollars but spiked higher one more time to 675 before beginning a downtrend that lasted the entire day.
For short term trades like this it is best to identify targets from recent key levels. 667 was the prior day’s high and what is known as a “soft gap” fill. The prior day’s afternoon support was 663.50 and offered a second reasonable target area. Looking at a 2 minute chart you can see that traders were paying attention to these levels as the first acted as resistance once it was breached and the latter acted as support.
Here is a bigger picture view that shows the prior week’s blow off top and a new range being established.
Steven Spencer is the co-founder of SMB Capital and SMB University which provides trading education in stocks, and options. He has traded professionally for 18 years. His email address is: [email protected].
Steven Spencer is currently long BABA, KING, LOCO, MNKD, OHRP, TWTR, WMT and short NQ, ORCL
