NFLX Update / Trade Management

As many of you know, NFLX has been a favorite short position and a member favorite that I probably get more emails about 99.9% of assets out there.  I know a lot of you cashed out on earnings at a nice gain, but I suspect NFLX has a lot more downside.

The recent lows that were first pumped as a buying opportunity by CNBC and then with the news of Mark Cuban buying NFLX isn't all that convincing to me. Wall St. types tell you what they want you to know for their own advantage, otherwise they spend hundreds of millions a year trying to disguise what they are doing, take the advent of Dark Pools as an example.

I'm still holding the NFLX short positions we have opened and will continue to do so unless I have a good reason not to, which I'll try to show you and in that case it would still only be a temporary closure of the position with every intention of re-opening it.

 This 3-day chart of NFLX shows a healthy price/volume trend at "A", then as NFLX progresses through the 4 stages and ends with stage 4 decline in 2011, there's a capitulation event (selling climax) right where the gap down (yellow arrow) on high volume occurs. As I have always said, a capitulation event doesn't mean the lows are in, just that the momentum of the stage 4 decline is broken, stage 4 is for all intents and purposes over and the asset has a chance to form a new stage 1 base, but it will usually drift lower before that happens.

At "B" we start to see a new primary cycle start to form with stage 1 accumulation/base followed by a break-away gap at "C" (yellow arrow) in to stage 2 and what looks to me to be a monster long term Broadening Top (sometimes called a megaphone top). I think this is NFLX's swan song, I think this is the top that changes everything for NFLX. Note the very unhealthy price/volume trend at "C" (above volume) in to the Broadening Top.

On a weekly chart, just to get a larger perspective of underlying money flow, NFLX is very strong through 2011. The base at 2012 is the first sign that NFLX is losing something and the leading negative divegrence which is infinitely stronger than the 2011 top/stage 3, that we see right now is a  major red flag for NFLX in the primary trend sense.

On a daily chart, you can see the Broadening top a bit more clearly. There are a lot of cherry picked examples of technical price patterns in books like Technical Analysis of Stock Trends and others, they do a disservice in teaching people to identify a price pattern rather than the underlying emotional and supply/demand issues (which flow from emotional patterns) which create these price patterns.

If you understand the emotional dynamics which are what create the supply/demand dynamics, you can identify these price patterns that are very useful, but otherwise don't look "exactly" like the cherry picked textbook examples that you rarely see in real life.

Typically there are 5 points of contact in a Broadening top with the last rally attempt to the upper trend line falling short, many times only about half way to the upper trendline before they fail and break below the lower support trendline.

There are more specifics as far as the initial break of the support trendline like volatility shakeouts "if" technical traders identify the price pattern and react to the break below support, such as the volatility shakeout of new shorts who enter on the break of a H&S tops's neckline, which is why of 3 areas I'll short a H&S top, one is NEVER the break below the neckline as it's just asking to be shaken out.

As far as the recent earnings related gap down and subsequent CNBC pump and MArk Cuban buying, I haven't felt like its a threat to the core short NFLX position I am still keeping active.  The fact is, there's just not enough time to accumulate a position that can do much upside damage that quickly. 

NFLX's 5 min chart shows a strong negative divegrence and I think it's coming down, probably in line with the broader market. There's a chance that there's additional accumulation near the $330 level and even on the decline toward that level. If there's a support trendline established with 3C accumulation, a break below that or head fake move/stop run would be highly likely and if that happens, I might close the NFLX core shorts for a short period as that would give NFLX more of a basing process that could support a stronger move like a gap fill, although bigger picture, I think the top is in so I'd be looking for new opportunities to re-enter at better prices and lower risk rather than sit through unnecessary drawdown and opportunity cost.

However, at this point, I don't have any evidence that will happen, it's a scenario I'm looking out for, but no more than a new lower low and eventual break of the top pattern and a primary trend lower, but in a much larger secular sense.

 NFLX's 10 min chart alone is enough to tell me the highest near term probability is a move lower, at least to the $330-$340 area.

15 min NFLX also leading negative.

The current price action has created a rounding top-like price pattern, so if we do see a "Igloo/Chimney" with a head fake move above the recent rounding over, I'd consider that for a put position in NFLX, otherwise I don't plan on taking any additional action for the positions already in place (short) that are at double digit (20+% ) gains.

If you're interested in a possible put/option position, I'd set some price alerts for a move above the $388-$390 area, if that happens I'll check the 3C charts and I'd assume we'd see distribution in to that move, but I want to verify and then enter a put position.