Netflix (NFLX) Red Dog Reversal

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

About Scott Redler 367 Articles

Scott Redler is the Chief Strategic Officer of T3 Live. He develops all trading strategies for the service and acts as the face of T3 Live. Mr. Redler focuses on thorough preparation and discipline as a trader.

Mr. Redler has been trading equities for more than 10 years and has more recently received widespread recognition from the financial community for his insightful, pragmatic approach. He began his career as a broker and venture capitalist where he was able to facilitate relationships that led him into trading. Beginning his trading career at Broadway Trading in 1999, Mr. Redler moved on with Marc Sperling to Sperling Enterprises, LLC after establishing himself as one of the best young traders in the firm. As a manager at Sperling Enterprises, continued to trade actively while working closely with all traders in the firm to dramatically increase performance.

Mr. Redler has participated in more than 30 triathlons and one IronMan, exhibiting a work ethic that also defines his trading. His vast knowledge and meticulous attention to detail has led to regular appearances on CNBC, Fox Business, Bloomberg, and he is a regular contributor to Minyanville and Forbes’ Intelligent Investing blog. He has been quoted in the Wall Street Journal and Investor's Business Daily, among other publications.

Scott received a B.B.A. in Marketing/Finance from the State University of New York at Albany, graduating Magna Cum Laude from Albany's School of Business.

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