We'll start with the most volatile name on our list this week, Netflix (NFLX). The video service has been all over the place in the last year, but more recently things have been more one-sided: Since the calendar flipped over to 2013, this stock has seen its shares rally by 83%. Now, with shares consolidating sideways, there's a tradable setup in this stock.
That's because Netflix is consolidating in a pattern called a rectangle. The pattern is formed by horizontal resistance above shares at $200 and horizontal support below shares at $160. That's a very wide range, but that is endemic to volatile stocks like NFLX. Think of it this way: As long as NFLX stays within that $40 range, its price action is meaningless. Instead, traders should be watching for a breakout outside of the channel. When the breakout happens, expect Netflix to continue moving in the direction of the breakout.That makes NFLX especially important to watch on the downside. Shares gapped up hard early in 2013 following strong earnings numbers, and a move below $160 makes this stock likely to re-fill the gap. On the other hand, investors looking for a buying opportunity should wait for a move through $200. Yes, that means ceding points by sitting on the sidelines, but that opportunity cost is repaid in the form of a higher-probability trade setup.
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