|This Trade Was Closed April 10, 2013|
Closed this trade idea out today – multiple opportunities to take profits in the last several days. I do not think it will reach my downside target of 155 so i’m closing it with price now at $167. Option is valued at 10.50 compared to cost basis of 7.60
Original Trade Post:
3/19 Update: Re-opening this trade idea as I believe that this bearish trade is valid again with price dropping below the $180 neckline today.
Netflix has a potential Island reversal forming on the 2 year weekly chart, and is 109% extended from its 200 day moving average. Usually stocks that are 70%-100% extended from their 200 day reach a climax and eventually sell-off.
Most interesting though, is on the daily chart I see a bearish Head and Shoulders pattern that has a target of $155 to the downside, combined with a pattern of bearish divergences that you should take a look at.
In watching Netflix lately, I’ve noticed that its chart is very reminiscent of Ann Taylor’s stock chart from August 2012. ANN released a positive earnings surprise on August 17th causing ANN shares to up 15% on the open that day. That was a breakway gap that sent ANN up another 25%. However, as ANN began to settle into a trading range, it never was able to rise up to the upper bound of its bollinger bands. That is a sign that the stock was weakening in its upward volatility, and a bearish signal. It formed 3 peaks that created a bearish head and shoulder pattern, and went on to also show a bearish CCI divergence. Eventually bulls gave up and/or shorts saw an opportunity, and ANN sold off hard on October 2nd, dropping underneath the Head and Shoulder neckline, starting a decline that sent ANN all the way back down to the earnings gap up day by November 12th.
Netflix has the exact same bearish characteristics going on right now.
1. Had a earnings related gap up that sent the stock up 40%
2. Had continued to climb another 42%
3. But has not touched its upper bollinger band since the gap up on ER
4. Has 3 recent peaks that form a bearish H&S pattern
5. Has a bearish CCI divergence
I am expecting for a drop in the next week, so am picking some deep in the money put options ($215 puts have a delta of -.91) as my vehicle to make a leveraged bet on a decline in the shares of NFLX sometime before March 15 weekly OPEX. Break/even price is $183, which is roughly where shares are trading right now.
Longer term traders can select a longer dated put option. ANN took about 3 months duration from the time it gapped up to fall all the way back down to that gap up price, so I’d suggest a May put for longer term traders since NFLX’s gap up was in January. I may modify this trade into that after this trade expires.
Make sure to check out the chart I’ve attached comparing ANN to NFLX.
- The Ticker: NFLX
- The Trade
- Buy to Open Apr 2013 175 Puts at 7.60 or better
- Trade Opened: March 6, 2013
- Trade Closed: April 10, 2013
Chart courtesy Finviz. Click to open larger.
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