Interpreting Sharp After-Hours Price Reversals Before Earnings

Summary

The document describes a repeated after-hours stock price pattern observed before earnings announcements: a sharp decline shortly after the regular close, a rapid reversal above the closing price, and a second drop back toward the close before the earnings release. The examples mentioned involve major technology stocks, with the movement occurring while after-hours liquidity may be limited.

One proposed explanation is that large orders could trigger stop orders on both sides of the market, letting a trader accumulate shares during the initial decline and sell into the rebound. The author questions whether such a sequence could produce a net profit and whether deliberately trading this way in an illiquid pre-announcement market should be permitted. The account is anecdotal: it provides no trade data, order-book evidence, attribution, or proof of manipulation, so the suggested mechanism remains speculative.

Key ideas

• The observed pattern consists of rapid price swings after the close and before an earnings release.
• The account says similar behavior was noticed before more than one company announcement.
• A proposed mechanism is that price moves trigger stop orders and provide opportunities to trade against them.
• The document does not establish who caused the moves or whether the sequence was profitable or improper.

Tags

# How did this after hours massive NFLX short/long strategy make a profit?


# How did this after hours massive NFLX short/long strategy make a profit?












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?

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.