NFLX Trade

I entered NFLX today at $186.11. Here is what I wrote to trade report members:

My watchlist is rather small right now and there aren't any good entries, so I'm going to take this opportunity to analyze a focus list stock that is not an easy sell as a long or short right now, NFLX.

NFLX has been a 2010 juggernaut momentum stock. It's been the textbook trend pullback trade. In 2010 there have been at least eight good opportunities to enter, and I, along with many of you, have traded the stock successfully. There is another pullback that normally would be a good entry, however there is a key difference in this pullback whencompared to the others---volume.

Take a look at the enclosed chart. Each arrow signifies a pullback buying opportunity that was successful. Notice that the volume pattern in each of these instances shows higher gray bars than red bars. This tells us that the stock was being accumulated. The pullbacks were natural profit taking that occurs in all uptrends.

Now take a look at the current pullback. The red bars are nearly as high as the gray bars, and there are more than one. This is a concern. There are signs of distribution. Now this does not mean the stock is definitely going to fall here. However, it needs to be noted. There is a less of an "edge" to entry here. Many times there will be one more boost higher before a big fall. So keep this in mind. If a major support area breaks, be ready for entry.

Because we focus on risk/reward ratios, it's still okay to enter long. If we take a small loss, that's fine as long as we continually take 2:1 or 3:1 trades. When I see distribution starting to settle in, I like to get closer to 3:1 because the probability of a successful trade decreases.

If entering here, around $185-186, the natural target and stops based on support and resistance would be 179 and 205. That gives us the 3:1 risk reward we need for this setup.

I just entered at $186.11. Remember, you have to be willing to embrace a small loss here. We are looking at long term gain, not the result of one trade or the short term win/loss record.

Charts: AMLN, BEAV, WYNN, BHP

I entered four positions today, 3 shorts and one long. My market bias has turned bearish with recent distribution (price down stong oh high volume) on SPY.

WYNN is showing signs of topping, though it is stronger than the market. Recent volatility and stronger volume to the down side make this an attractive "anticipatory short" with low risk if stopped out.






















BHP is an oversold bounce setup that is nearing support. Note that I am bearish on this stock and only playing a potential bounce. Stop is under the February low (close).

























AMLN: Bear flag under the 50 day moving average.






















BEAV: Break of 50 day moving average, which acts as uptrend line.

Short Setup: FUQI

I pointed to FUQI as a short when it was around $30. I took the trade, which would have been successful had I used a wider stop. It's now broke down below the 50 day moving average and is showing distribution in the volume pattern. I will short on a pullback to the moving average, as long as strength is not on strong volume. The setup here is moving average breakdown off a topping pattern.

Is FUQI Ready for a Fall?

Momentum stocks usually give ample warning before taking the inevitable fall. Is FUQI showing signs?

Key SPY Support Level

SPY is nearing converging support levels and oversold stochastic levels. A low risk opportunity may present itself near the 50 day moving average.

Take note that the volume pattern is showing distribution.

5 Great Short Setups

The following short setups all feature one of my favorite short setups: consolidation post downtrend featuring a negative volume pattern (distribution). A continuation of downtrend is expected.

VCLK, RS, SNDA, AMAG, ATK

VPRT Showing Signs of Cracking

Notice the negative volume pattern during recent consolidation period.

RIMM Showing Bear Flag and Distribution

RIMM is at the top of my focus list for shorts. Notice the bear flag formation and bear flag that has formed under the 50 day moving average. The volume pattern is also showing distribution, with heavy volume on the recent drop.

The Apple Short Trade Continues

The AAPL short trade is turning into a textbook example of the overbought and evening star candle setup. So what do we do from here?

Support may be found at the old pivot high, around $135. This would be a good area to exit shorts and possibily enter long.

However, longs should be wary of the distribution pattern that is forming. Take note of the tremendous pick up of volume during this downswing. I would not be surprised to see a small bounce or a retest of the recent high, creating a "double top", followed by a strong down move.

Distribution Showing Up In Brazil ETF (EWZ)

EWZ, along with the other BRIC countries, has been on fire of late. However, the recent consolidation has the look of a short term top, with the volume pattern suggesting distribution.

Note the high volume down days during the recent consolidation.

Another Stock Showing Strong Distribution: WYNN

WYNN was on the long list for quite some time, but has now reversed and is the perfect short setup. A bear flag has formed, with volume that's showing distribution. Many like to wait for price to breakdown out of the flag pattern. I prefer to enter early, when price is at the to of the range.

Strategy Session: Using Distribution Patterns to Predict Trends and Trend Failure

The second most important aspect of my trading strategy (behind support and resistance) is using volume to classify stocks that are under accumulation and distribution.

Distribution is under way when, over a period of time, stocks show higher volume on down days and lower volume on up days. In a bullish trend, this predicts the trend will pullback or fail. In a bearish trend, expect the trend to continue until the distribution pattern is reversed.

Take a look at GME. This stock shows classic distribution. During the recent uptrend, positive volume was putrid. Trend failure was easily predicted. Currently, the distribution pattern is continuing. This suggests a retest of recent lows.

I will likely short this stock soon.

Game Plan For Monday

Here is my detailed plan for Monday and the coming week, as sent to subscribers in today's Trade Report:

May 18, 2009

Market Notes:

The market has pulled back close to the entry point we've been watching (87-88).  The pullback is not ideal, as price has not pulled back in an orderly fashion.  Also, while volume is not significant enough to show distribution, the pullback was not on below average volume.  

These two consideration decrease the probability of a successful trade, and could point to a deeper pullback to the 50 day moving average.  However, the setup does offer a good reward to risk ratio.  An entry at $88.50, with a  stop at $87 and target at the old high around $92.50 gives us a 2.5 to 1 ratio.  This ratio makes the trade acceptable, even if the probability has decreased.

Another factor that concerns me about the long trade is that my focus list is starting to show more short setups.  I am still willing to trade SPY on the long side since the risk ratio is good.

Game Plan:

Get long SPY if it hits my target entry area.  Balance this trade with short setups from the focus list.

Sectors:

Here are the top performing sectors that also show good price patterns:  Dairy, Ag, Internet Service Providers, Drug Manufacturers. Beverages.

Banks, real estate and auto related fields lead to the downside.  

Trade Tracker:

I am still holding NTRS short and SDS. 

Focus List:

shorts: bke, rrgb, cpla, ntrs, brcm, gme, rl

BKE broke it's uptrend and now shows a distribution volume pattern.  Bearish flag is forming.  

RRGB is similar to BKE.  Broken uptrend with consolidation under new resistance.  

GME shows distribution and is pulling back up to moving average support.

BRCM is not as clean cut as the above chafrts, but does show negative distribution and the possible start of the second leg down.

RL shows more of the same.  A pullback to the 200 day moving average would be ideal.

Longs:  IBN, MTN, PPS, MRVL, ACL, MSTR, ERTS

Extreme oversold setup:  DHI.  It's not ready quite yet.  I'll detail this setup tomorrow.

Disclaimer:  All information and opinions expressed in this report are to be used for entertainment purposes only.  The author of this report is not an investment adviser and does not give buy, sell or hold recommendations.  Trading stocks is a risky undertaking, and due diligence is required before making a trade.  Consult an investment professional before making a trade.  The information in this report is not verified and may be incorrect.  The author of this report may or may not hold a position in stocks mentioned in this report.

Gold and Silver Stocks are Setting Up as Shorts

Many gold and silver stocks showed distribution patterns on the recent pullback. here are a few of my favorite short setups: PAAS, SLV, AEM, KGC