Watching Netflix -- for a Short Sale

 | Apr 10, 2013 | 9:00 AM EDT
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I am stalking a sell setup in Netflix (NFLX) for several reasons. First, this stock has been overdone to the upside for quite some time, although it has not fired off any sell signals until recently. Let us take a look at what is happening there. On the daily chart below, we have seen the five-day exponential moving average cross under the 13-day EMA. That is a bearish signal. We have also seen the stock price drop below the 50-day simple moving average -- another bearish indication. The stock has taken out a prior swing, indicating a trend reversal to back down. Finally, the chart has a downside gap to fill. (While I don't always see this happen, many traders watch for it.)

NFLX Daily
Source: Dynamic Trader

I am watching two areas for a possible short in this stock. The first zone comes in at $175.68-$178.74. The second zone comes in at $181.82-$182.52. These areas were calculated by running Fibonacci price retracements of prior swings along 100% projections of prior rally swings that I have illustrated on the daily chart. There is also one minor Fibonacci extension included in Zone 1.

Notice that the prior rally swings marked on this chart have been between $16.68 and $22.82. These are the swings that I have measured and projected, because they help identify where potential resistance to the rally from the April 8 low might come in.

This is how I want to play the stock: If Netflix rallies into one of these price resistance clusters and stalls, I will drop down to a 15- or 30-minute chart and watch for a sell trigger. Please see here for more detailed information on this.

For me to think it is worth placing a bet on the sell side, I would need to see the the downside crossover between the eight- and 34-day EMA, as well as a prior swing taken out on the lower-time-frame trigger chart. At that point, my maximum risk could be defined about $1 above the high end of the second price cluster zone at the $182.52 level. If I do not see any sell triggers, I will not short this stock. If I do, I will use options for the trade.

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