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Oct 22

Putting The Netflix Move Into Perspective

“Netflix tumbles to levels not seen since… Thursday.”

That’s not a headline you’ll read anywhere but that’s one reality of what happened today. Let’s not sugar-coat it though, there’s no question that was one ugly session. I’m sure there have been fortunes made and lost today, and today’s session could become the stuff of legend and a test case for intraday traders everywhere.

But let’s just put it in perspective for a moment, because this is a classic example of how important time frames are, and how you view $NFLX today will likely be determined by your own particular time frame and methodology.

For people with longer time frames than mine, here’s the monthly chart of the last 5 years:-

AlphaCapture

I commented last night that CEO Reed Hasting’s comments chastening momentum driven stock moves seemed like a way to distance himself from any potential repeat of the 2011 cascade. I tend to believe when a CEO is more cognizant of that, it probably coincides with the actual threat being diminished, but that’s a subjective opinion, and people did seem to latch on to those comments today.

Here’s the weekly for the last 2 years:-

AlphaCapture

That’s one big scary reversal candle there, and it’s only Tuesday. But are you seeing what you want to see, is that candle influencing your interpretation? Here’s the exact same chart but with a line instead of candles:-

AlphaCapture

Suddenly doesn’t seem quite so forbodeing does it?

Here’s a daily showing this year:-

AlphaCapture

and here’s today on a 5-minute (one of the few you will ever see on this blog!):-

AlphaCapture

In perspective, given the magnitude and potential significance of the move, that is quite an orderly decline.

Finally, here’s what we’ve been using for our own position where we’ve been long since 7/9 at around $235, but will now be exiting at Wednesday’s open. As of today’s close we are up 37.2%.

Netflix ($NFLX) +37.2%

Is the uptrend still intact? Strictly speaking, yes it is. But this is one of those rare occasions you will see a trend follower like myself exit a position which is still above its major MA’s, with a series of higher highs and higher lows largely intact. The reason? An ATR stop. At the end of the day we are in the business of analyzing price action, and when a significant change in behavior is evident an ATR stop will protect you. It’s a ‘gamechanger’ or ‘step aside’ signal to me, and it often involves taking a decent profit in something that moved extremely quickly but is way above the normal level you would need to see breached to confirm a trend invalidation. We saw a similar thing in $TASR recently where we realized a 52% gain after a spectacular run and subsequent steep selloff.

AlphaCapture

Here’s the real takeaway from today’s move.

If you want to be the best trader you can be, I thoroughly recommend using hindsight. All my critics do. The trouble is, your P&L won’t reflect the wonderful insight hindsight provides you. Do I wish I could have taken profit at the highs? Actually no, because it would mean I would have broken my rules and created a precedent likely to be repeated at some point in the future. Probably at great cost too. Furthermore, the fact that this time would have been rewarded would have reinforced somewhere in the recesses of my brain that it was acceptable.

Calling tops and picking bottoms is not what I do. I find trends, I ride them, when they’re over or the risk changes, I get off. To do that effectively I need to wait for confirmation. It’s taken a while for me to get here but I’ve found what works for me. It might not work for you, that’s OK, I hope you find what does. Every now and then my method throws some real curveballs that leave others scratching their heads. This is one of them. If it makes you feel better, $NFLX made 24 new highs since that 7/9 entry. Barring another huge gap at the open tomorrow, we’ll be exiting at a price that was the 21st of those 24 highs. So there you go, I’ll be selling it tomorrow right where you would have been telling me I was greedy if I didn’t, at the all time high of just 3 weeks ago.

Better?

Perspective is a wonderful thing.

 

 

6 comments

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  1. serendipitoustrader

    what a post Jon….mind blowing perspective indeed.

    1. Jon Boorman

      Thank you

  2. Jim Ackerman

    What settings do you use on your ATR indicator? Thanks.

    1. Jon Boorman

      Hey Jim, there isn’t a single setting I use for everything, it’s one of those things that’s down to personal preference depending on your risk tolerance and timeframe. A 3x ATR (21-day) seems to be standard for most people. For long term trends you might find higher than that more appropriate. For some stock trends I’ve used as high as 6x ATR, 100-day. In Andreas Clenow’s book ‘Following The Trend’ for replicating CTA’s performance in futures he uses 3x 100-day. I’ve heard some CTA’s use 12x ATR for very long-term trend following.

      1. Jim Ackerman

        thanks

  3. Shaun

    Great post!!!! A few years ago I would have had the same comments as John above. Nothing wrong with what John said if thats his process, but as you said, you have to stick to your process. Thanks for sharing!!!

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