Here's How to Play Netflix After Earnings

It reported earlier this week, but this stock is far from "old news"

Few stocks get as much publicity as Netflix Inc. (Nasdaq: NFLX).

Anyone with even a marginal interest in the stock market knows that the company reported mixed earnings Monday night, beating estimates on earnings but missing on revenue and the all-important subscriber-growth metric.

The stock plunged as much as 14% on Tuesday but quickly bounced back to net a drop of just 5.2%.

Analysts were quick to defend the stock, saying the dip provided an excellent buying opportunity. Some even raised their price targets. I guess year-over-year growth of 40% and a stock up 98% for the year - after the earnings plunge - deserves some leeway.

But of course this is all stuff you can read on Google News; just plug "Netflix" into the search bar, and you'll get dozens of stories saying mostly the same thing.

I'm going to show you something you won't get anywhere else, though: my proprietary analysis, which is spotlighting a juicy profit play here.

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It's got everything to do with what happens - almost all the time - when Netflix takes a tumble of more than 5% in one trading day...

This "Combo" Appears Before Profits Pile Up

Like I said, I looked at Netflix's past performance - going all the way back to its IPO in 2002 - to see how the stock performed after a one-day drop of more than 5% when its 50-day moving average was rising (as it is now).

The results are impressive, to say the least. Let's take a look...

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My research showed that this combination – a rising 50-day and a one-day decline of 5% or more - has happened 71 times prior to this week.

In the three months following these drops, the stock finished higher 76% of the time for an average gain of 34%.

The remaining 24% of occurrences resulted in an average loss of 17%.

If this were Vegas, you'd get a 3-1 chance of making a profit that is twice the average loss!

That translates into an average return across all occurrences of 21.4% in three months. That's the market-crushing performance I love.

I don't know about you, but I'll take those odds all day, all week, and all year long.

As you can see in the chart above, the recovery started almost immediately. In fact, the stock closed Tuesday above the 50-day moving average - that's a trend line it's crossed (and closed) below on just five trading days in 2018.

Looks to me like the probabilities are playing out as expected, but there's still plenty of time and lots of upside for the taking here.

There's something else: I'm so confident in Netflix's resurgence that I'm recommending a special trade I've researched on it this week to my Night Trader subscribers. According to my research, this could provide the maximum leverage for the expected post-earnings move.

That's the only reason I'm not making a trade recommendation here today.

Of course, you can always click here and learn how you can get all of my Night Trader research.

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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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