Trading Netflix Using BLSH

Continuation from Friday…..(Long/Short -OR- Buy Low, Sell High, Go Short & Cover?)

Shortly after its IPO in May of 2002 the company’s stock price settled into a fairly stable trading range. Oscillating between $10 and $40 from mid 2003 to November of 2008. At which juncture the stock price broke out of its trading range to zoom up to its intermediate top of $300 by July of 2011. Collapsing to $64 or 78% shortly thereafter before staging a massive come back rally to approximately $475 by the third quarter of 2014. Where the stock price remains today.

Let’s for a second assume that you were fortunate enough to invest in Netflix Inc, for whatever reason, sometime between 2003 and 2008 at an average price of $25. If you are still holding this investment your ROI is around 1,800%. A fairly good outcome considering a holding period of around 10 years. However, let’s take a look at what would have happened if Buy Low, Sell High, Go Short & Cover investment strategy was instituted instead.

Trade #1: Buy NFLX at an average price of $25 sometime between 2003 and 2008.

As the stock priced pushed into its 2011 July top, all Netflix investors should have been gravely concerned. For a number of reasons. First, the stock ran up close to 1,500% in just 2.5 years. Suggesting that a speculative bubble was forming. Second, by 2011 most of the company’s fundamentals were out of sync with any sort of reasonable valuation levels. Finally, the cyclical and mathematical market structure suggested that a 5-year bull market that started in March of 2009 was about to take a one year break in its 2-1-2 internal composition.

In other words, given the circumstances above, investors should have been watching for signs of a reversal. Ready to liquidate their long positions and to go short immediately.

NFLX2

The first sign of a reversal occurred in August of 2011 when NFLX broke below its upward trending support line at around $265. Investors should have liquidated their long positions at that time and gone short as the correction was just beginning.

Trade #2: Liquidate your long position at $260 and go short at the same price. Net realized gain up to date $235 or 940%.

Netflix’s stock price proceeded to quickly collapse to $64 by November of 2011. Representing a 79% decline from its top of $300 just four months earlier. This was a massive drop and all investors (long or short) should have been aware that such quick declines are unusual, the stock was now oversold and that some sort of a bounce was coming. That is to say, investors should have been watching for a bottom. Ready to cover their short positions and to go long as soon as some sort of a reversal confirmation was obtained.

To Be Continued Tomorrow…….