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Short Trader: Bears Snuggle Up to Netflix

Shares of the online movie rental service have sat out the recent rally.

Editor's note: Formerly, Dan Fitzpatrick's short trading ideas were available only to subscribers to's Short Advisor. Now these picks are being offered to RealMoney and readers.

With the bulls running wild on Wall Street, it's a bit tough to find shorts that last more than a day or two. Simply put, there's not enough stock to soak up all the money sloshing around out there. But a good indication of where the money is


going is when a stock fails to advance in a strong market.

That's what


(NFLX) - Get Netflix, Inc. (NFLX) Report

, the online DVD rental company, is doing now. The stock has declined during three of the past five days and is very close to breaking out to the downside. Also, earnings numbers were released last month, so that potential catalyst is out of the picture.

Let's look at the chart below.

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Notice the symmetrical triangle after a substantial decline that began in December. This type of pattern usually winds up being a continuation pattern -- a "rest stop" before the stock continues in the same direction.

So I suggest using the support line drawn in the chart as the basis for the short entry. Consider taking an entry at about $21.95, with a buy-stop up at $23.10 for around 5% risk.

An alternative entry -- and one that's not shown on the chart -- is on a bounce off support up to about $23.50. If that scenario develops, then the stock could be shorted as close as possible to resistance, with a buy-stop just above $24.

The initial downside target is $18, but use trailing stops along the way. Shares closed at $22.60 Wednesday.

Netflix (NFLX) -- Daily

Update on a Previous Pick

Last week's idea, Microsoft , offered the short entry at $29.20. The stop was set at $30.25, where it remains. The stock closed at $29.40 Wednesday.

At the time of publication, Fitzpatrick held no positions in the stocks mentioned, although holdings can change at any time.

Dan Fitzpatrick is the publisher of, an advisory newsletter and educational forum dedicated to teaching effective risk management and trading methodologies to aspiring traders and investors. He is a former hedge fund manager and a member of the Market Technicians Association, and he now trades from his home in San Diego, Calif. While Fitzpatrick holds various securities licenses, he does not give recommendations to buy or sell stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback;

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