I have been trading “momo” stocks for almost two decades. What makes stocks like NFLX, TSLA and FB so enjoyable to trade at times is the almost monolithic behavior of their large investors. This behavior greatly increases the risk/reward for short term trading setups. That is why I always spend time covering these stocks in detail in our AM Meeting when they have a well defined news catalyst.
This is in stark contrast to virtually all other large cap stocks, especially commodities, that have many different types of players cluttering the price action at most times. Netflix is comprised primarily of momentum focused investors and traders. When they perceive the company is gaining momentum they rush in. When they perceive the company is losing momentum they rush out.
I wrote two posts last week dealing with Netflix. The most recent one discussed the idea that the second quarter earnings report removed the “sell the news” trade that had been setting up due to the stock’s recent large run up. You can read the post here. But basically what I wrote was that after some initial profit taking in the pre-market or just as the market Opens we should look for another leg higher in the stock. How to trade this scenario is mainly dependent on your risk tolerance. Here are three examples of how a short term trader could enter a long trade in NFLX the day following its earnings release. I’ll mark up a chart below as well.
- Buy at after hours/pre-market support (most aggressive. lowest %. highest risk/reward)
- Buy after the Open when the stock has bottomed and has its first “reversal bar” (higher probability)
- Buy after the morning high is breached (highest probability with buyers firmly in control but worst risk/reward)
Here is an image of the written game plan we share before the market opens that assists traders in setting price alerts or automated trading scripts. Notice how I left “resistance” blank. This is my subtle reminder that traders should be focused on long setups.
Based on my experience I believed that 114-115 was a reasonable target area for the day (shared in this post). Once it reached that target area in the late morning I adjusted my thought process to allow for a move as high as 116-117. This move beyond my original target area set up an excellent short setup the following day. This trade will be covered in my next blog post.
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 19 years. His email address is: [email protected].
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