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Despite posting strong numbers — with revenue up 16% and full-year guidance raised — Netflix (NFLX) has taken a surprising hit, sliding 8% over the past 11 trading days. When a fundamentally solid stock like this pulls back hard, it tends to raise eyebrows. And for mean reversion traders, that’s exactly the kind of set-up that gets us interested. The key question, though, is how do you know when the selling has run its course? Just because a stock drops doesn’t make it an automatic buy — the trick is identifying the turning point with some degree of confidence. That’s where technical indicators come into play. I outline this entire approach in my book “Mean Reversion Trading,” and there are plenty of real-world trade breakdowns on tradingextremes.com. For this particular setup on NFLX, I’m watching two specific indicators: Directional Movement Index (DMI) This indicator consists of three components: the DI+ (green line), the DI– (red line), and the ADX (blue line), which measures trend strength. Typically, a downtrend is in play when DI– is above DI+. But when the two lines begin to shift — with DI+ rising and DI– fading — it can signal that the tide is starting to turn. That’s exactly what we’re starting to see on the NFLX chart. DI+ is creeping higher while DI– begins to decline — a potential sign that the bearish pressure is fading and bullish momentum is gearing up. MACD (5,13,5) The MACD (Moving Average Convergence Divergence) is a classic tool for spotting trend reversals. While the standard settings (12,26,9) are widely used, they can be slow to react. To speed things up and get earlier signals, I’ve fine-tuned the inputs to (5,13,5). In this case, the MACD line (blue) hasn’t crossed above the signal line (yellow) yet, but it’s getting close. Past crossovers at similar price levels have consistently marked the end of short-term corrections — so if the signal fires this week, it could set the stage for a potential reversal trade. The Trade Setup: NFLX 1175-1180 Bull Call Spread For this mean reversion setup on NFLX, I’m using a bull call spread — a straightforward options strategy that caps risk while still offering solid upside. One of the reasons I like this setup is how efficient it is: you can get exposure for around $250 per spread, and scale in easily by adding contracts as the trade unfolds. To put some numbers behind it — running 10 spreads would mean risking $2,500, with the potential to earn $2,500 in profit if NFLX closes at or above $1180 by expiration. This trade is designed around a price range of $1175–$1185, with the idea being to structure the spread just around where the stock is trading. If NFLX pulls back further and dips below $1175, I’d consider adjusting the strikes down — for example, setting up a $1170–$1175 spread — to take advantage of a better entry with potentially higher reward. Here is my exact trade setup: Buy $1175 call, Aug 29th expiry Sell $1180 call, Aug 29th expiry Cost: $250 Potential Profit: $250 -Nishant Pant Founder: https://tradingextremes.com Author: “Mean Reversion Trading” Youtube, Twitter: @TheMeanTrader DISCLOSURES: (NFLX bull call spread expiring on Aug. 22) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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