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Netflix Off The Cliff?

11/21/11 12:45:18 PM
by Donald W. Pendergast, Jr.

Shares of Netflix have taken a real beating since peaking last July. Will the new RMO sell signal bring even more sellers into this particular market?

Security:   NFLX
Position:   N/A

When a stock has already had a devastating decline along the lines of what we see here on Netflix's (NFLX) daily chart -- a plunge of nearly 75% in a four-month time period -- it's easy to assume that the stock is a goner and that each new sell signal is just as viable as the ones that preceded it during the discounting of the stock. Sometimes, however, it still pays to step back and take in the big picture behind the entire chart. That's what we'll do now with NFLX's daily chart (Figure 1).

FIGURE 1: NFLX, DAILY. While this might look like a good place to short Netflix, always remember that the market will always have the final word regarding any move in any stock. Risk control becomes extremely important anytime you are short a stock or futures contract.
Graphic provided by: MetaStock.
Graphic provided by: RMO system indicators from MetaStock 11.
Truly, there are legitimate investor concerns regarding the forward earnings growth potential of Netflix, as is clearly depicted by the huge open gap on NFLX's daily chart. News of the unanticipated loss of the company's subscriber base really gave investors a dose of panic -- but with the stock now homing in on a key support level (possibly for a much-needed retest), hard-headed bears in this stock should consider waiting to short until they see how the stock reacts to the all-important $74.29 price level (blue dashed line on chart).

The trigger for Thursday, November 17's RMO (Rahul Mohindar) swing sell signal is just below $75.79; one way to go short is to check the broad market advance/decline and volume figures as the stock approaches or actually drops below that price level. If the entire market is tanking, you stand a better chance of at least making some short-term money on this setup, should it decide to drop another dollar and a half down to that support level at $74.29. Even on a small 100-share trade, that could mean as much as $150 in profits on a pure momentum move.

With the long-term money flow (based on the 100-period Chaikin money flow histogram at the bottom of the chart) still in negative territory and the market as yet unwilling to close the horrendous open gaps (both "dirty" and "clean" gaps manifested during the October panic in this stock), going short NFLX here using that particular tactic might be very appropriate, but the use of dedicated, unmovable profit targets and stops/trailing stops would be a very necessary part of any such strategy.

Those interested in holding on for a longer-term move lower (if the trade triggers on a drop below Thursday's low, that is) might be best served by using a three-bar trailing stop of the daily highs and may also wish to book at least partial profits near $74.29, as that zone could be the potential launching pad for a nasty short-covering squeeze. One way or another, you've got to be extra nimble and flexible anytime you're short any stock or futures/forex market.

Bottom line here is this: Yes, earnings matter, and eventually the lack of earnings in a stock will cause its price to fall. In fact, even the hint of a possible decline in earnings can hit a stock hard. However, the timing of such actual selloffs can be extremely hard to do without the aid of a proven mechanical trading strategy. Hopefully, the two strategies laid out here can help you make some wise trading moves, no matter if NFLX decides to fall off a cliff or rebound quickly in a violent short-covering rally.

Use a good system and a wise set of trade and risk management rules and you'll probably avoid a lot of unnecessary heartache, no matter what Mr. Market decides to throw at you.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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