As I began writing this post, I couldn’t help but feel a bit of déjà vu back to the $NFLX trade review I wrote about 3 months ago. Both trades were very similar: 1) Same stock (obviously); 2) Very similar type of setup; 3) Strong fundamental catalyst behind it (15% earnings surprise); 4) Strong price action; 5) Very good risk/reward entry.
After reporting better-than-expected earnings on April 15, Netflix stock gaped up to new all-time highs. Over the next couple of weeks, the stock proceeded to consolidate and go sideways. As the stock carved out support and resistance levels, I simply marked up my charts with these important “inflection” levels. $553 was an important area of support post-earnings and $570-$574 was an important resistance zone. I thought buying into this support zone represented a very low risk entry for a move back up to the $570ish resistance at a bare minimum, likely even higher. I got long an initial position at $553.20 with a stop at $549.95 (which, based on my upside targets, was over my 5-1 risk/reward minimum). I was planning on adding if it got above and held above $560, which would act as confirmation for me….
Two trading sessions later, I was quickly rewarded with a 20 point gap up with the help of a BAC upgrade. The stock was gaping up right to its resistance zone around $570-$574. I was contemplating whether or not I should just get flat on the gap up since it had met my initial target area (I was ultimately playing for a move much higher though). But I didn’t have the chance to add like I had planned, so I was in a relatively small position. I ended up selling 90% of what I had bought earlier right on the open and hoped that I would be able to buy back some shares a bit lower. I want to emphasis the importance of patience and waiting for your setup: I was faced with an unexpected, albeit favorable, situation and I acted accordingly and remained patient for a low risk setup to present itself.
I began nibbling back on the long side as the stock filled 80% of its gap, and I was again planning on adding if/when there was a hold above $560 (barring a repeat of the BAC upgrade of course). I eventually added to my position above $560 as planned, and the stock continued to run up and eventually broke out above prior resistance around that $570ish level. With the post-earnings consolidation in NFLX being roughly 20 points, the measured move was around $590-$595, so that was my “hopeful” target (assuming everything went to planned, which it rarely does of course).
After scaling out of my position on the way up, I then added back to some of my position as the stock pulled in and retested its prior resistance (note, I wasn’t in as big of a position as before even after adding since the stock was close to my upside target). I was again met with luck as news of a Chinese partnership came out, which caused the stock to gap up above $600 yesterday. I immediately sold all of the shares I added from the prior day and again got down to a very small-sized position (about 10%). I ended up officially getting flat into the close for the first time since May 1 when I first got long…some 60 points ago 😉 While there was no real reason to sell technically, I wasn’t sure if I would be able to monitor my position early next week so I ended up just booking the last of my open profits and called it a day.
The chart below is the most recent version with all of my trade management highlighted.
I also want to emphasis how “luck” will undoubtedly play a part in trading. Of course there will also be times when you’re “unlucky” e.g., stock gaps down on a news-related catalyst, analyst downgrade, etc. But if you put yourself in a strong position from a risk management perspective by only taking on good risk/reward setups those rare unlucky events will have less of an impact in the long run.
— Jake Huska (@MarketPicker) May. 1 at 03:15 PM
— Jake Huska (@MarketPicker) May. 6 at 10:57 AM
Current consolidation in $NFLX on the daily chart very similar to the move back in February (long):
— Jake Huska (@MarketPicker) May. 8 at 03:45 PM
— Jake Huska (@MarketPicker) May. 14 at 11:36 AM
— Jake Huska (@MarketPicker) May. 15 at 03:52 PM
Thanks for reading. Let me know if you have any questions or comments.