Hello everyone. It's a little bit after one in the morning here in Maryland, and so it's about time to call it a night. However, I did promise some comments about Netflix before I turn in. In a pretty flat market today, Netflix took off to the upside throughout most of the afternoon. Apparently, a rumor was circulating throughout Wall Street that Microsoft was interested in acquiring the company.

After several point of upside went by, I decided to purchase some November 70 puts in Netflix, but it turned out that my timing was off as the stock continued until very near the close. My impatience aside, most of the move can be attributed to the fact that an overwhelming percentage of the company's shares are short and this fueled a good part of the meteoric rise.

The question now becomes, what are the odds that Microsoft may actually pursue a purchase of Netflix? Given the strong cash position that Microsoft has, it would certainly be an easy purchase for them to digest. However, they would be buying a company who is struggling to find a profitable strategy in an increasingly competitive market. Amazon is making great strides with its streaming media business, and Apple has been rumored to be on the verge of entering the fray as well. The attraction to Microsoft, of course, would be to get a jumpstart if they want to compete in this space.

My feeling is that Microsoft is unlikely to make a bid. Microsoft management has failed to create new and interesting revenue streams for years now, and would have to rely on the existing management team with Netflix if they moved forward. Given the fact that Netflix CEO Reed Hastings is seen as being less than stellar by both investors and analysts, I can imagine Steve Ballmer becoming enthused about that option.

Finally, Netflix posted mediocre revenue and earnings earlier this week, and built on that news with tepid guidance for the future. The stock cratered almost $10 after the earnings announcement, a sign that big money voted with their feet. Most interesting to me is that I don't believe Netflix would have presented such a lackluster forecast if a potential takeover was in the offing. Rather, I believe they would have been decidedly more upbeat, attempting to keep stock prices elevated so that Microsoft would be compelled to offer decidedly more money for the company if they were interested.

Anyway, I find myself down on my put position, but not particularly interested in taking the loss right now. My downside is completely protected if the takeover does come about, but if the more likely scenario unfolds and lack of an announcement leads to weakness in the shares, I believe I can back out of this with a pretty good profit in the next week or two. Whatever you do, use common sense, and never let a position get so large that the tail wags the dog.

Disclosure: I am short [[NFLX]].

REGN - beautiful turnaround on Wednesday and looks like a run to new highs is very possible with any type of market stability. (click to enlarge)

PATK - upside reversal is built off powerful turnaround candlestick on Tuesday, where it flashed an excellent buy point. Hard to imagine that this is not ready to rocket to new highs very soon. (click to enlarge)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I have had an extraordinary amount of market thinking to do as Monday approaches because my portfolio is both heavily bearish and non-diversified. By no means do I recommend this. It's dangerous and not a necessary technique for making stock market profits, but here I find myself. I will work through it, and we can sleuth out this type of problem-solving throughout this post.

The first question I ask myself when the new week approaches is always the same: Am I trading AGAINST the direction of the market? The NASDAQ tumbled on Thursday after Google's (GOOG) earnings report was mistakenly released with three hours left in the trading session, and lost another 67 points when things resumed on Friday. Clearly, my bearish portfolio is consistent with the short-term "mood" of the market.

It gets trickier, though. At what point has the index moved with such velocity and distance that the trend is in danger of ending, even reversing? When it does switch gears, you are obviously in danger of giving up your gains, so situational awareness is key. Technical analysis would have you believe that various tools can predict such a turn, but I believe that those calculations are of very limited value until an individual is experienced enough to use them in proper context (this is why I coach traders). I will attempt a more complete training on how technical analysis tools can be helpful, but that will have to wait for another day. Here and now, you'll just have to hear about how I feel things stand this weekend.

This first chart, which is a daily graph of trading activity of SPY, bears comment. SPY track movement in the S&P 500, an index of five hundred fairly large American companies. It shows that we have been grinding away between the red and green lines for several weeks now, and Friday's move down pushed us much closer to the red bar. If all follows plan, we'll reverse from around that point and turn higher.

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But, there's a chance we pierce that line and start a new leg down. Selling might then accelerate and support could be much lower. I think the odds favor support at the red line, but would not bet the farm on it. That being said, I think it makes sense to hold onto bearish positions until we get there. It seems too early to lean bullish just yet.

It is valuable to understand when market moves have become so extreme that the likelihood of a reversal becomes high enough to jump on. My favorite gauge of these overbought and oversold conditions is a study calculated by a beautiful program called EdgeRater.

The software drills down into the individual stocks that comprise the S&P 1500 to determine where each is in relation to its Bollinger Bands. That number ranges from -1 to +1, with those values equaling oversold and overbought, respectively. Frankly, at the individual stock level, very little predictive insight comes from the Bollinger Bands, but when 1500 stocks are categorized by where they stand along that scale, we can pinpoint extremes with ease, and buying into the imminent reversal is not difficult at all.

As you can see on the graphic below, more stocks are resting at oversold levels than not, but the skew is far from the extremes that I have watched it reach.

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In summary, we are nearing levels from which a bounce will almost have to happen. But we are not at any point where the odds are overwhelming and, therefore, it seems most prudent to add bullish positions (longs) with patience. The corollary is that bearish positions (shorts) should be unwound slowly too, so that we let the last go when a very high number of stocks are badly beaten up. We will watch the action this week to see if the market takes us there.

Disclosure: I am short [[SPY]].

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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[[PMT]] - Gotta tell you that this pattern is a total winner in my book. Orderly pullback has followed a blast to new highs. I just love buying dips like this.

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[[TEX]] - This one has settled into a continually tightening trading range. Typically, they move nicely in the direction of whichever way they breakout of the range, so prudent traders wait to see what the verdict will be.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.