How the index is going to tell us what comes next, plus the best way to trade $NFLX’s miss

Free After-Hours Analysis: 

Tuesday was another bad session for the S&P 500. The index lost 0.7%, adding to Monday’s 0.5% loss and making this give-back the biggest in a month.

Let’s be honest, things must be pretty good if the biggest thing we are worried about is a two-day, 1.3% decline. That said, every big selloff starts off small.

So which is it? An insignficant wobble on our way higher? Or the start of the next downturn?

Since both of these outcomes start the same way, looking backward won’t give us the answer. Instead, we have to look toward what comes next, most importantly, what happens Wednesday. If prices slump at the open and the selling accelerates, this dip isn’t done and we still have a ways to go. On the other hand, open weak, bounce off of those early lows, and close well above those lows, the worst is already behind us.

This divergence on Wednesday forms the basis for our next trade. Bounce and close well, that is a buy signal with a stop under the intraday lows. If Wednesday’s selling cannot find a bottom, lock-in profits in our existing positions and agressive traders can short a violation of 4,100 with a stop just above this level.

Most likely this is nothing more than a minor wobble on our way higher. But we are due for a down wave and if it is getting started, we don’t want to be caught on the wrong side of it.

NFLX reported disappointing subscriber growth after the close and got smacked in after-hours trade. There are only two ways this plays out. Either this is a lot of nothing and the stock will continue higher. Or this is the start of the next big pullback. In a stock with such a sky-high valuation, there no room inbetween.

Much like the above index trade, it all comes down to how NFLX closes Wednesday afternoon. Bounce from the early lows and this is buyable with a stop under the midday lows. On the other hand, close near the lows and this turns into a short..

Let the market tell us what direction this stock is deaded and then hang on for a quick buck.

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