I’ve seen thus market action 2 times now in the past few months.

The first was before ADBE earnings release, and most recently was NFLX release.

The setup:

  • Earnings release pending after hours
  • Market closes
  • Within the next minute or two after the market closes, but definitely before the earnings release, a massive short kicks in, dropping the price ~3 to 5% below the close
  • ~10 seconds later the price reverses and the stock rises about 3 to 5% above the close.
  • finally, within 10 seconds, the price drops again near the close.

Earnings weren’t released until 5 minutes later.

My thoughts:

  • a fellow trader on StockTwits said that he has seen this type of action before in bear markets.
  • it seems plausible that the massive short could have triggered a bunch of stop losses, allowing the algorithm to buy shares. The subsequent massive long could have triggered a bunch of stops above the close, allowing the algorithm to sell those shares as the stops were triggered.

Questions: Has anyone else seen this behavior? Should it be legal to do this in an illiquid market just before earnings release? Although plausible, it seems unlikely/counterintuitive that this would result in a net profit?

NFLX after hours massive short/long candle