Netflix (NFLX) broke powerfully higher overnight on earnings, continuing a multi-year uptrend and confirming the concept of “what is strong tends to get stronger.”
Let’s view the Monthly, Weekly, and now Daily Chart to highlight where price has come and where it might be going now.
As a bonus, we’ll step inside today’s intraday action for a quick lesson on day trading power-trending stocks.
We’ll begin with the Monthly and Weekly Perspectives to set the stage:
The monthly chart highlights the initial IPO, sell-off through late 2004, lackluster performance from 2005 to 2008 which gave way to the stellar rally from 2009 to the $ 300 peak mid-2011.
Missteps from the company in 2011 sent investors fleeing, collapsing the price from $ 300 toward $ 50 again.
Not to be outdone, the company regrouped and we have the current major bull market rally that skyrocketed price in a “ten-bagger” from the $ 50 level to the current $ 550 per share “shoot the moon” area.
The Weekly Chart also provides a quick history of the recent bull market structure which propelled price from $ 50 to $ 550 in about three years.
Shares developed a year-long trading range between $ 300 and $ 500 from which the current break occurred.
Note the positive divergence (seen better on the Daily Chart) going into January 2015 which set the stage for the most recent bullish swing off support back to the $ 500 level high – continuing the range.
Price gathered momentous strength recently which preceded the breakout surge we see today:
Pay particular attention to the “Double Bottom” and lengthy positive momentum divergence into the $ 320 per share level – the critical higher timeframe support zone – from an educational standpoint.
Some of the best strategy-based trades come from identifying a buy signal on a LOWER timeframe – such as a lengthy positive divergence – which occurs into a major support level on a HIGHER timeframe.
Bonus points are awarded if the higher timeframe chart ALSO shows a positive momentum divergence (which was the case here).
January saw a big breakout off the lows into the $ 400 level, and just like the current breakout, buyers powered price through the round number resistance.
The major clue from the chart that “something big may be happening” was the similar positive momentum divergence into the $ 400 per share level and – more importantly – the big bullish volume and bullish gaps (a sign of urgency to buy shares or impulse) AFTER the divergence occurred.
Note the multi-day upside gaps on higher volume – memorize this bullish pattern.
Earnings plays are risky, but they do offer opportunities (often played best with options to limit gap risk) for those willing to play them.
Note the two similar “divergence into support with bullish volume” patterns that preceded the last two earnings events.
And if you missed the play as most of us did – or don’t play earnings events – you can step inside the intraday action to capture some smaller yet efficient profits as price travels higher.
Here’s the 5-min intraday chart so far today with three possible trades highlighted:
Keeping everything simple, the goal is to trade IN the direction of a trend as it develops.
This is done either by purchasing shares on a BREAKOUT (#1 and #3) or on a RETRACEMENT (#2).
With the upside gap and the ongoing bullish action, the question became “Where Do I Get In?”
The first risk-controlled opportunity (meaning, not closing your eyes, buying shares, and hoping for the best) was the breakout above the prior price highs and minor resistance level into $ 545 per share.
Note again the slight pick-up in bullish volume and bullish candles signaling a likely continuation breakout higher.
The same logic holds for Trade #3 above the $ 556 level.
Inbetween the two breakout trades was a smaller “Retracement” or “Bull Flag” opportunity.
We like to buy shares on price retracements TO a rising moving average (20 EMA here) which would be aggressive or else on the breakout ABOVE the falling “flag” trendline (highlighted).
Trail the stop under the rising 20 EMA on the 5-min chart and hold the position until price breaks under a rising trendline.
While there are more sophisticated ways to trade intraday strength, often focusing on simple strategies calms the mind and puts us in a better position for profits.
Continue studying the multitude of lessons available to us from all timeframes of this “strong getting stronger” stock.
Follow along with members of the Daily Commentary and Idealized Trades summaries for real-time updates and additional trade planning.
Corey Rosenbloom, CMT
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade