NFLX trade Set-Up

Yesterday after hours, NFLX put out earnings and had an interesting reaction to them. We often see earnings that don't exactly make sense, usually they'll beat or miss and move the opposite direction that you'd expect and that usually is because Guidance which is not typically part of the top/bottom line earnings, is what matters most.

In NFLX's case, an open longer term core short position for us that's still at a +14.35% and +2% gain  even after yesterday, things are a bit more complicated than the headline earning's print.

As such, a few members have asked me to keep an eye on it which I intended to any way and to make a long story short, while I don't think this is the exact moment to enter any new positions in NFLX, I'm not concerned about the long term core short position and I think given a little time, we'll likely have a great entry for new or add to positions (short).

First earnings came in with Q4 EPS of $1.35, nearly double the $0.72 expected which started a massive short squeeze in after hours last night.

While EPS beat, Revenues missed expectations of $1.49Bn, printing at $1.48Bn, yet EPS was nearly double consensus, how?

Here's how: NFLX Q4’14 Net Income/EPS includes a $39m / $0.63 benefit from a tax accrual release related to resolution of tax audit if traders bothered to read the full earnings, but with algos trading at supersonic speed, no one has time for that anymore.

 If you subtract the $.63 per share from the $1.35 EPS print, you get... $.72%, right at consensus/expectations.

I don't like Jim Cramer, but I'm not going to say he's a buffoon, he's a smart guy, but he only shares that wisdom in rare instances, in my opinion the rest of the time he's more vested in his Wall Street buddies who are in a far greater position to help him out than he is in his viewers, but that's my opinion and I'm probably the last person to give an opinion considering I don't watch CNBC or Cramer.

However in a Street.com interview he gave to Aaron Task years ago before the first I-Phone came out, one I suspect many people including himself wish he hadn't given, he was remarkably candid in talking about how Wall Street and he himself would move the market through less than ethical means. They'd create an atmosphere that traders would follow and then they'd fade that to make a long story short. I think some would call it market manipulation, I believe he called it a "Grey area" and said he did it as a fund manager, it was fun and anyone who was not willing to do it, shouldn't be in the game. 

I use to start all of my Technical Analysis classes (when I taught Technical Analysis for the Public School system's adult education program for nearly 4 years) with this video/interview and I can't tell you how disheartened everyone in the class looked after hearing it, they realized the market is not a fair and level playing field, that everything they believed was bunk and they heard it straight from the mouth of someone most of them probably watched every night. I'd purposefully show this not to dishearten people, but to let them know what the reality of what they were up against actually was and more often than not, you have to think like these criminals to beat them.

However, the point about Cramer was he said one of the truest things you'll ever hear about the market ad I paraphrase, "The market is not about value, earnings, etc. THE MARKET IS ABOUT PERCEPTIONS".

We have forecasted this in advance before an F_O_M_C_ policy statement as 3C showed a small stage 1 base for a bounce/rally in place almost a week before the F_O_M_C and it fired off at the policy statement on a knee jerk reaction and as I always warn, "Beware the knee jerk reaction, they are almost always wrong" and then after some time the entirety of the F_O_M_C gains were retraced.

Again the point being, at the speed of trading these days, the reaction is out far before the entirety of the information is out and as such, it's the reaction (price movement) that dictates the initial "perception" of the information. For example, take the December 16/17th F_O_M_C meeting, I had warned about this back then, that there was a small base in place and that the knee jerk reaction was going to define the policy statement despite what it actually said...

Here are some excerpts from posts on the 17th of December (F_O_M_C announcement at 2 p.m. that day)...

A.M. Update

"The 7 min charts are starting to really look impressive ... I suspect we will likely see the IWM move ABOVE the range soon enough, I would think today either in to the 2 p.m. F_O_M_C or at the press conference after....Remember this is not a move that can last...I'd sell short in to the move at the appropriate time or just be patient and continue to manage shorts that have been doing well, they'll come back  with a sharper downturn when this is all over"

Market Update at 11:45 a.m.

"As for the scenario... HYG has been one of the biggest give-aways that this scenario was on track. The accumulation I've seen the last several days in HYG (as well as other places like the averages/Index Futures)..has been screaming "Set-Up". There's only 1 good reason to accumulate HYG even in small size while HY credit and even investment grade credit is breaking down and that's to use it as a leading lever to manipulate the market higher when it doesn't have the strength to do it on its own."

Levers In Action @ 1:34 p.m.

"While I believe TLT will head higher, near term it is being used as a ramp today...5 year yields, a leading indicator are leading the SPX higher today...30 year yields, part of our TLT analysis are leading the market today as we have been forecasting due to 3C signals in treasuries....The most obvious lever of all, HYG as there's only 1 reason to accumulate it as they have this week in such an environment and you see the reason on this chart as HYG leads the SPX higher as one of our best leading indicators...And the 4th is the simple USD/JPY, which is also leading the market today."


"In any case the F_O_M_C is in less than an hour, while I don't think the signals this week and price move are an F_O_M_C leak, otherwise the averages would have more accumulation, price initially determines how the F_O_M_C is received even if it is very hawkish, if the market is rallying, the knee jerk response will be that it was favorable and it provides the perfect cover, obviously considered when we first considered this Friday/Saturday."

These are just a few excerpts from a few posts, on the day of the F_O_M_C. Here's what the 3C SPY chart looked like in to the F_O_M_C...

 5 min SPY positive divegrence in to the December 17th F_O_M_C policy announcement, along with all of the levers (all 4 ) activated the same day, virtually guaranteed an upside knee jerk response no matter what the F_E_D said.

I also warned above on the same day, that the knee jerk move wouldn't hold...

 Here's the F_O_M_C on the 17th at 2 p.m. and the market retracing all knee jerk gains.

And here's the 3C negative divegrence in to higher prices setting up the retracement of those gains whether selling longs in to strength that were accumulated just before or setting up short positions for the downside retrace.

By now it should be clear that it is the market's reaction (price) that determines how information is initially PERCEIVED which is all that really matters to the market, PERCEPTION.

SO BACK TO NFLX...

So we have Revenues that missed. We have EPS that actually came right in at consensus and additionally and perhaps most importantly...

Q1 guidance, at $0.60 which is not only lower than a year ago, but also substantially below expectations of $0.78. This is the killer of earnings, even a strong beat will sell-off on poor guidance because it's not what you did, it's what you'll likely do in the future and if guidance is calling for less EPS than a year ago, less than expected, there's few good reasons to stick it pout long NFLX, you could say (at least for the time), they have created and it doesn't get any better than this, in which case, there's no reason to expect NFLX to sustain higher prices.

Additionally, Free Cash Flow. At ($78) million, this was the worst quarter for the company in years.

So why did NFLX pop over +17% today... Well just like the pre-F_O_M_C set up, just like the "bounce" set up now right in front of tomorrow's ECB meeting... NFLX was already set to ramp higher as you'll see on the charts below...

 First the daily longer term chart is a lot like the SPX's Broadening Top and there's resistance at a gap just a bit above, thus NFLX didn't only move up on earnings. but completed (nearly) a gap fill which I suspect had some market makers trapped with inventory at higher levels they needed to exit. The market has been ruthless over the last 5 years about filling gaps unlike before QE so I'd say it's safe to assume part of the plan for NFLX despite earnings, was to create an atmosphere or a perception that earnings were good with price as price put that perception out there long before anyone could finish reading earnings. People rarely argue or doubt price, even with a horrid earnings report like this, they just go along, but that' not always a great idea as we already saw with the last F_O_M_C that has already retraced all gains.

 The daily NFLX chart shows a stage 1 base, stage 2 mark-up and a stage 3 top (Broadening) with the appropriate long term daily negative divergence at the top. The next stage is 4, decline.

However as you can see, before earnings were released, NFLX was already set for a pop higher,

I doubt this was on a leak as earnings were pretty ugly, it was more likely on the need for a gap fill.

Again, the 15 min chart was set up in advance for a move higher near term.

As of today, the intraday charts already started showing strong leading negative divergences like this 1 min chart.

Which was strong enough to migrate to long timeframes like the 2 min

And 3 min

in fact out to the 10 min chart in a single day, so there's some heavy distribution underway.

What we need to see is the a5 min charts go negative, once that happens, NFLX should be approaching a great area for a short set up at higher prices and much lower risk. The longer term charts point to that, the charts today on the move to fill the gap point to that.

As you know, while it sounds nice and we'd like to see it, the market rarely sees a reversal down from a move like this on a dime, it's a topping/reversal process, not an event unless some fundamental data changes that, so I'd look for a topping process over the next days and week/s, it probably will have something to do with what the broader market does and when its bounce is over.

All of that being said, all objective information we have suggests NFLX will be or already is a great looking short position, for new entries it's more about timing than anything and at the rate we saw the charts move today, I think NFLX will probably be ready about the same time the broader market is ready to roll over from the bounce it has set up and in place, which is probably (just like the F_O_M_C) set up as a sentiment mover for the ECB policy due out tomorrow, whether it disappoints or not, in the short term on a knee jerk response, it's perception and price leads that, then the details and truth set in and the market responds appropriately.

HYG Save, Still Mixed Up Signals

I'll just use QQQ as an example, although each average is a bit different, we know the Q's put in a move that could be sold in to.

As mentioned in the last update, HYG looked to be active and activated on the market's intraday , afternoon turn to the downside, likely effecting a rescue as it wasn't that harsh of a move to slow and reverse on intraday charts.

I suspect there may be some buying in to the close on ECB anticipation as well.

 QQQ 1 min negative from yesterday and today and the most recent positive, likely with some HYG help. It's clear it's not a strong positive intraday, it doesn't even have any kind of intraday base.

 The damage to the 2 min chart above and 3 min chart below remains.

3 min

And while there's some 5 min chart damage to the far right on apparent selling in to higher prices, the gas in the tank for the bounce divegrence (white) is still more than sufficient to get a bounce off, this is really why I haven't made any kind of near term trend expectation changes.

Again, the theme is pretty close, but each average is a bit different, likely based on their relative performance,  you can't sell in to something that's red on the day.

The 5 min Index future charts are by and large, worse on the day, even in to this latest afternoon stick save.

 ES 5 min worse on the day specifically.

And now the 7 min ES chart has joined the 7 min NQ chart and is showing a negative on the day as well. This is clearly not as bad as NQ and TF is still in line, but the trend pointed out yesterday of small, constant negative signals continues today.

Leading Indicators- Second Verse Same as the First...

So after looking at Leading Indicators, a lot of the deterioration I was documenting yesterday and last night in the Daily Wrap, continues today.

Again, I can't say at this point this is enough to change short term expectations, but at best, it's not helpful in any way I can conceive.

Lets just dive in...

 The same SPX:RUT Ratio (red) indicator that has been showing deterioration since the VIX Term Structure Buy signal (White painted on price bars and below) is again showing non-confirmation and more deterioration today.

The VIX TS buy signal is not failed, it has been several days early in the past and the SPX:RUT put in a positive signal in to the bottom area where the VIX TS gave a buy signal. It is just that today we see a continuation of yesterday's weakness and weakness that started developing before that.

While the SPX:RUT Ratio is a specific indicator performing a specific function, you can get the same net result with Wilder's RSI such as the chart above on a daily showing divergences/sell signals at both areas in the yellow boxes and a positive divegrence in the area of the Descending Triangle I've posted several times as a perfect head fake price pattern and set up.

A closer look at the same RSI on a 10 min chart shows the same positive at the triangle lows and a negative in to recent movement higher.

And on an even faster 5 min chart you can see the negative signal today specifically. Stochastics as well as ACD or any Oscillator used in divergence mode rather than overbought/oversold, should give roughly the same signals.

It appears that HYG (High Yield Corporate Credit), one of the most popular levers for ramping a market, has been trying to stem the afternoon price decline and looks like it may have, but this may tell us that higher prices were aggressively sold in to , thus the need for HYG as a ramping mechanism.

When looking at HYG's intraday 1 min 3C chart, you can see a positive divegrence as if they were trying to use HYG to stem afternoon downside, which could suggest (a few things),  that they want to get this bounce off, however there's significant selling pressure on any price strength. Thus HYG may have been used to keep the base from falling apart with a deeper downside move.

The intraday roundtrip volatility similar to yesterday is also worth noting.

Again, not all, but one of the HY Credit assets I use most continues for another day to register negative. This is not across all HY assets I look at and that's why I'm not making a big deal of it , but it is notable.

And pro sentiment is falling for a second day which is notable because it has been such a strong leader both in to negative moves and positive ones.

We still don't have a smoking gun and this may all be a wash, but the trends of mild deterioration continue.

Market Charts

I'm going to put out one other update, but as usual, because of the fast nature of intraday signals, I can't have charts that are too old.

Last night I documented some negative activity, not enough to make any changes in near term expectations/forecasts such as a market bounce off 14th- 16th small "W" bottom.

My "best guess", is that the ECB leak this morning was a test of how the market would respond to the proposed size of an EU QE program, but there are so many details, different forms, possible legal challenges, possible lack of support, I don't think it's worth speculating on unless we can see something that is specifically pointing to a leak that looks strong enough to be legitimate.

However I do want to continue to document any changes, especially with a leak out there.

The last "Quick Update" about intraday trade didn't include charts because it was rather fast moving. However for the same reason I included such charts last night in the Daily Wrap, I'll include them now, if there's a fast moving market and a sudden and important change, I don't want you to feel like you skipped several chapters in the novel, I want you to be able to understand what has transpired, what has changed and if we get an outlier event/signal, I don't want you to feel like, "The last I heard we were expecting a bounce and now...".

Not to be confusing, I am still expecting a bounce off the same base area mentioned above, but do want to document changes, if for nothing else, to allow you as much information as I have to make any decisions you may want to make.

The charts of the averages...

 SPY 2 min change in character today leading to downside.

This was more evident in the ES 1 min chart.

The SPY 3 min chart still has a decent positive divergence/bounce base in place, there hasn't been any deterioration that would make me think a bounce is still not the most likely near term course.

Obviously, from market action yesterday and today, it seems pretty plain that this bounce is suppose to line up with the ECB announcement, which has too many "ifs" to even start to speculate about,  I'd just warn not to get complacent in the conventional wisdom.

 Interestingly, the 5 min chart has been for the most part, the division between a bounce and weaker charts that in multiple timeframe analysis would represent what comes after a bounce, and that is a negative trend.

So to see deterioration on the 5 min SPY is interesting. While it didn't migrate over from the 3 min chart, it is entirely possible that the 5 min chart caught transactions at certain times that would not necessarily show up on a 3 min chart, at least not in trend form that creates a divergence. This is rare to see, but does happen.

 DIA 1 min negative intraday which is very clear.

This migrated over to the 2 min chart. Remember though the base for the bounce is largely on the 3 and 5 min charts. However again, I need to give you a heads up on these changes, especially if I find more in other places that start to build a case for a change in near term expectations.

The QQQ 1 min has a very nasty 1 min divergence, but recall it was the Q's that had the sharpest move higher yesterday.  In other words, to sell in to price strength, you need price strength which the Q's had yesterday, thus seeing a sharper negative divergence here is very much in line with short term bounce expectations and how we get to the next phase represented by the 10 min charts , SO THIS IS ACTUALLY CONFIRMATION OF WHAT WE EXPECTED TO SEE ON A BOUNCE.

The slightly different question, but along the same lines is whether we get a FAIL on the bounce like the last one off the lows of the first week of January (1/6) with the FAIL at 1/8. While it may not seem like it makes a difference in the near term expectations, it does make a difference in how we use them to our advantage and perhaps which assets are best suited to trades.

 QQQ 2 min looking really bad as well.

 At this point we even have some migration to the QQQ 3 min chart.

 The IWM 1 min chart was in line so I didn't include it in the warning and the TF 1 min was as well, but looking at the 2 min chart, there's obviously a negative divergence.

The IWM 3 min (bounce ) positive is still intact.

As for Index futures...

ES 1 min with the pre-market positive and the recent negative.

 Yesterday I made note of the 5 min charts going negative as well as the fact that in the past, I'd use these as short term trade signals so a negative ,like this would be a set-up for a short position, or in other words, there had to be at least a 5 min Index future divegrence to enter any trade long or short.

The deterioration here seems to be notable.

The 7 min chart has been the neutral zone, kind of like the difference between the averages' 5 min positives and 10 min negatives, however while ES and TF are still pretty close to in line here, NQ, again the average that moved the most yesterday, is showing the worst divegrence on a 7 min chart which is actually negative, maybe not as solid as 5 min charts, but it is negative. The fact I don't have the same for ES and TF is partly what holds me off from making any short term market expectation changes.

I'll be adding leading indicators as well...

Quick Market Update

It looks like from both the averages and futures that everything except the IWM, is getting ready to make an intraday move lower, perhaps back to yesterday's range

Precious Metals: Silver

For a while I've held the belief that gold and Gold miners would be moving toward a longer term, primary and maybe even secular bull market move. That analysis, while not having changed, was put on the back burner for a while until the longer term signals started to clear up.

Shorter term, you're probably aware I'm expecting some downside in GLD, from the looks of the charts, SLV too. However, it may be time to revisit the longer term GLD perspective, especially with a pullback in prices and a few things on the charts that look like perhaps precious metals may very well take the place of stocks in the very near future as risk asset of choice.

Gold

 This is one of several near term signals suggesting a fairly decent pullback in gold. Of course tomorrow's ECB policy announcement can have some wild fluctuations and I've heard everything from the ECB will come out with a bazooka and the market will sell the news to nearly the exact opposite, all from Investment bank analysis, the point, no one really knows, but for now, we've been expecting a near term GLD pullback, yesterday's post dealt with this, GLD Update, including a reversal down right in this very area which so far looks to be on track today from the loss of the early gap up.

GLD has never really recovered since our 2011 top call and Intermediate to primary downtrend to follow, if you look at a 5-day chart of GLD like this, you don't see much of interest...

However, add some trendlines and some macro versions of our head fake concepts, nearly exactly the same as what we are looking at with the short term market bounce we are expecting or at least that has been setting up, and you get a different view.

A closer look on a 1 day chart shows what we have suspected for some time was a large base being put together, albeit within the confines of what looks like a bearish descending triangle, although the price pattern is much too big to be anything of the sort, traders still view it in this manner.

As per usual with a head fake move, we see it just before a reversal 9to the upside), it builds momentum. In this case that head fake move would be in the yellow area, creating a bear trap and thus as it moves back in to the triangle, a short squeeze. So in fact, the short term action in GLD, may put us back on track to start considering the longer term position.

Silver is in a very similar situation...

 This long term 2 hour chart of SLV shows an impressive positive divergence, even though I'm not a big fan of silver for all of the manipulation through the years.

 The shorter term 5 min chart shows a base (white), mark -up and the same sort of near term negative divergence (pullback) that we are expecting in GLD.

The 3 min SLV chart shows this sharply, much like GLD's charts in similar timeframes.

As do the shorter intraday charts.

While we do have some GLD pullback positions, like GLD puts, I am starting to think more and more that we'll be looking at longer term positions in either PM shortly.

Quick Biotech Update & Market Model

After yesterday's move in biotechs which we covered in the Daily Wrap yesterday as an example of "selling in to strength" as biotechs got started on a bounce before the rest of the market or the expected bounce in the rest of the market, this is what we have the morning after.

 This is a very long term 4 hour chart. The areas where Biotechs are in line or confirming price action are above the green arrow, the area where biotechs are seeing a change in character and a flow of funds out start at the red arrow. Remember this is a big picture/highest probability primary trend.

 On a more useful shorter term 30 min chart, you can also see the areas of confirmation of the price trend and where that goes south. The yellow trendline would be my minimum bounce target making this a trade that comes to us, but we do want to confirm negative divergences in to that bounce which we saw yesterday on the sector's 1.7% gain.

The 5 mi chart shows the bounce base, in line at first and as we start to cross the yellow trendline, note the change in character of 3C. This is also what we saw on shorter term charts posted yesterday.

This is a very detailed 1 min chart including yesterday's activities and bios are lagging today.

This is what I expect to see in a "sell in to strength" move.

The SPY is close to making or starting a similar move. The divergence for the base we have been watching for just about a week is still intact...

 This SPY 3m chart shows the decline on a negative from a rounding top to the far left, the first truly oversold condition and positive divergence launching a move higher that seemed to be cut prematurely on the 8th as we saw some very unusually early negative activity sending the SPX lower in to our second base area.

Yesterday I posted this chart of what looks to be a bearish Descending triangle...

The triangle is the right size for a consolidation/continuation pattern from December to present. This is a very familiar price pattern for technical traders, which is why I suspect it's what is being targeted as technical traders are predictable in how they'll react, which is used against them.

The gist of Technical Analysis says this is a bearish continuation pattern that "should" break support and make a new leg to the downside, this is decades old dogma, close to a century actually. TA also says, if the price pattern fails , for instance an upside breakout, traders should reverse positions and go long, which is how head fake moves are set up based on Technical Traders' predictability.

This is why I posted the price pattern yesterday and as you can see we have the small base for the move and we are near the breakout level.

I fully expect to see the same kind of selling in to strength in the major market averages as we are seeing in IBB (NASDAQ Biotechs) above... thus patience, "Let the trade come to you".