Thursday, July 23, 2009

NFLX and SOHU - Buying Breakouts

Click on Chart to Enlarge

The market appears to have broken out above the resistance I've been highlighting in recent days. Many stocks have made substantial breakouts the last 2 weeks, and while my views are not much different longer term, this breakout appears from a charting standpoint to allow for substantial further gains in the indexes. I'm not wildly bullish for sure, but there is no chart resistance for another 5-6% on the S&P, so I would expect the market to move toward those levels if the breakout holds.

Anyhow, for any coming short-term trades I will be focusing on bullish trades as long as the indexes remain above the 20 day MA. Since the June highs were taken out, that opens the possibilty, that even if we are still in a long term bear market, that the March-May/June move could just be the first leg in an a-b-c or w-x-y type of pattern. I don't really have enough of a grasp on it yet to really know what to expect on those grounds.

Now the post today is showing 2 stocks that I have buy orders for. I wanted to explain the rationale and show how to deal with potential buys around earnings. Most people are heeded not to mess with stocks before earnings and gamble on the outcome, which is probably good advice. But on the other hand, many nice breakout buys happen on earnings reports, and if you don't know how to trade them, then you will often miss the boat if following a breakout strategy like Investor's Business Daily teaches. Also, many of the best possible buys using this method will advance relentlessly after breaking out to new highs on big earnings gaps, and you never get a great buy point after that.

The chart above is Netflix, NFLX. I traded it once before early last year as it formed a similar basing pattern and broke out, and I made a quick 15% or so on the trade. The chart has basically all the notes. But earnings is after the bell today I believe (from yahoo finance). Now looking at the chart, it has formed a pretty nice base, and is picking up volume as it is moving toward the old highs. The problem is that there is no "handle" on the chart fo a buy point like IBD teaches. So you have to go with the old high as the buy point. Stocks that don't form handles and gap big to hew highs on big volume, often don't even come back down to the breakout point, so the orders I am using are 50.27 with a buy stop. Then a stop would have to go around 47.00 if the order gets filled.

Click on Chart to Enlarge

This chart is SOHU. Earnings is Monday morning I believe for this one. Again, since it is risky to buy before earnings, I have a buy stop order at 68.10, so that if the stock moves up strong above the "b" point, then the order will get filled. Then if filled, a stop should go abouot 7% below the entry price. However, from my experience, I don't like to see the stock close below the breakout point on a weekly close after breaking out. So if it does, you just exit right away with what will often be a very small loss, rather than wait to get stopped out.

In both these cases, and as a generalization, breakout plays will often make large gains in a short period of time and then its done. So you have to know ahead of time when to buy and place orders, so you aren't the late comer waiting till after the breakouts. You can often get some good buys that way in a bull market, but even so, the ones you catch will often be weaker stocks that don't just zoom up right away or make as big of gains.

So I am not going to track these on the blog, but I will make a post when I exit them (if the yget filled). So treat this as an educational post, but if IBD type methods are not something you are familiar with, you probably shouldn't even consider using this as any type of recommendation. If you are familiar with those methods, then both these are IBD 100 stocks, and you can do your homework and figure out whether they interest you personally.



  1. i'm seriously considering cutting out on this trade now and waiting for a ma cross or bowtie to get back in. some down momentum would be nice. i'll probably ditch sometime tomorrow during the down of a price cycle. i'll jump back in after that momentum starts to try to reclaim some of my losses.

    please keep the analysis coming though pete. it's very appreciated.

  2. of course... as soon as i cut out, the market will turn... haha!

  3. yes

    I will be exiting BGZ as well. Based on how you define momentum, etc, this move the last 2 weeks, only compares to about 5 other 2 weeks streches in the history of US markets. Just relentless. Wouldn't expect to have more than one trade like this a year.

    But Goldman Sachs....i mean "the market"....always wins, so best to live for another day if it turns out badly on a trade like this.

    I'm sure we will see some more of this type of thing on either the up or downside with the never before seen attempts to prop up credit, etc, and then what in my estimation will be never before seen dose of reality if/when it doesn't work.

  4. silly market, what is it going to do now? afterhours are making a move down. and then looking at the daily, a sharp move down might be interesting. i'll be busy tonight doing an "if it does this tomorrow, i'll..." and "if it does the other tomorrow, i'll..." if i'm lucky, i'll lose less money than i'm thinking i'm going to lose? perhaps today 'was' the last hurrah for the next week or two?

    perhaps if the bears show up tomorrow morning, the bulls will sell off too not wanting to hold into the weekend. well, that is probably me just wishing.

    bears, where are you!

    b... a.k.a the perma-bear

  5. Hey b

    one thing that is a pretty good guide from a charting standpoint on a breakout is to draw a horizontal support line across the closing highs of the prior high to the breakout, so the June 12th close I think it is in this case. Most breakouts that go on to much bigger gains, never close back below that point, or at least launch instantly if it does for a day.

    If we do see a close back into the range, then I think from seeing lots of charts that it could end up being a weaker (wedging) type move higher if it does go higher. I'm sure it could flat out reverse based on a bunch of indicators, but so far we are only seeing bull behavior, so it could just keep inching up.

    I'm with you on the longer term bear market. However, price is the bottom line, everything else is opinion until it isn't. So right now I am a grouchy bull (got traded from the bears) until there is something solid to go on from price itself as far as price reversals, etc.

  6. i know, time to exit. are you going to be putting up a preferred exit price?

  7. yes I will. I may also suggest a stop on the outside chance that this was a blow off type move and allow for downside. That will take some further declines to do that strategy.