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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 is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.