Netflix (NFLX) has had shorts on the ropes ever since Q4 earnings, surging as high as 36% in the days after the report. In highly shorted stocks like NFLX, these types of squeezes are always a possibility, even if the company only exceed lowered earnings expectations.
When a stock goes into a parabolic move, I will often look for a Red Dog 80-20 Reversal. A Red Dog Reversal occurs when a stock, after 3 or more consecutive strong, often accelerating, up days, a stocks trades above and then back below the previous day’s high. The Netflix reversal took a day and a half to fully trigger, which is sometimes the case.
Yesterday, NFLX continued to squeeze early but lost momentum late, giving back most of the day’s gains. After putting in what looked like a clear topping tail, NFLX was on my radar today for a move back through Friday’s high of $123.99. We got that move early today, and then we got a nice retest of that $124 zone before the bigger flush.
I covered my trade piece by piece on the way down, closing out the short around the $120 area. Netflix could see more downside, but as an active trader I will always be happy to book those easy profits and move on. If another pattern sets up, I will look to revisit this fast moving stock.
The Red Dog reversal not only provides potentially great reward, it allows a defined parameter for setting risk. In this case, if the stock traded with momentum and held back above that Friday high, I would have been done with the trade for the time being.
Disclosures: No position in NFLX