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Daily Game Plan: Volatility Is Up, and Time to Buy Netflix?

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The markets appear to be experiencing a holiday hangover.

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Market Check

While volumes are light across all indexes, price action isn't nearly as tame. The S&P 500 (INDEXSP:.INX) traded in a very narrow range for about an hour this morning, but sellers have since taken the reins. Currently, the Nasdaq (INDEXNASDAQ:.IXIC) is leading us lower, down about 1%, and the S&P 500 and Russell 2000 (INDEXRUSSELL:RUT) are both down about 0.5%. Gold and bonds remain fairly flat while the VIX (^VIX) has spiked dramatically, up about 10% for the day so far. The VIX has been trending higher for the past week or so, indicating fear is creeping back into the market - likely the result of failed fiscal cliff negotiations as we approach the new year.

Chart of the Day

Since bottoming in September, Netflix (NASDAQ:NFLX) has been very strong, up about 70% in a matter of only three months. What's particularly interesting about this move is that while the stock is rallying, its elevated short interest hasn't budged. Currently, 30% of the stock's float is sold short, and that short interest would take about six days to be unwound, based upon NFLX's average daily volume. This recent pullback to the 90 level looks like a good entry, and a quick move back to 100 seems likely. Key on the 20-day moving average (currently at 88.05) for a cue to exit the position should it move against you.


Click to enlarge

What I'm Expecting

Continued light volumes and potentially volatile intraday trading for the rest of the week. When volume is this light, one major market participant with some conviction can have a dramatic effect on prices. The 1420-1425 area on the S&P 500 has been broken today, and it now appears that we're headed for a test of the lows from December 14 near 1411, also near the 50-day moving average. Don't get overly involved on either side here, as the market will likely "show its hand" during the first week of January.

This article by Bryan Sapp was originally published on Schaeffer's Investment Research.

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