I once had an FB account. Then one day FB tried to force 'Timeline' down my throat and I said 'I've had enough'. I was already fed up with their erratic and often user-unfriendly, twice-a-week site makeovers and the timeline feature was just the last nail in that coffin. But personal prejudices should not come in the way of making trading decissions, so, today's post is going to be a technical overview of the FB stock as it stands at 12:30 PM on 7/17/12.
Looking at the daily chart you can see that after the huge IPO failure the stock touched a low of $25.52 before bouncing back to ~$33. Then it started its slow oscillation with a tentative double top formation, albiet a bit sloping (top of the channel). Now, the interesting thing to note is that no big news have come out in the recent past and the oscillatory stock price was a tell-tale signature that the shorts were just waiting to pounce back. The $30 price level was a psychological mark - any round good looking number is, by the way - and I decided to short only after a daily candle would close below that mark. I was getting ready because I knew that before their first earnings release there would be enough uncertainty to push the price below this level - at least the shorts would make one bid at it. Once that was taken care of it should be a no-brainer till $25.52, the June low. An interesting question to ask would be why I did not short when the bearish engulfing candlestick pattern formed, right after the double-top (A). That could indeed be an ideal trade for some, but I had better plays to deploy my capital at that time. With FB, I was only looking at a channel trade worth less than $2 because as long as the stock did not breach $30, you could not have counted on it to do so! DUH, but true! Instead I decided to wait and watch till it broke $30, a psychologically significant number, when I would be more confident of the price hitting the $25 level, thus generating greater reward fort a lower risk. The 'lower risk' part in the last sentence was not used flippantly. With a sharp breach of the $30 level (like we saw yesterday) you can be sure that your entry is shielded with a very strong resistance above your selling point. But near the point marked 'A' you do not have a well defined resistance. The channel top was just beginning to form and the stock might have made a bid for $34 and a whole lot of uncovered ground above in the coming days. Although one might argue that the low volume was a dead giveaway that it was headed lower rather than up, you have to pick your battles in this game and I had better ones.
A small reminder at this point. I use a combination of chart reading and news and that is how it should always be. Chart reading is nothing but reading the mass psychology which in turn is governed by news and views. So if you look at a chart and try to put it in context of what impending news can move the stock, then you are approaching the problem from a more holistic viewpoint. The stock breached $30 decisively yesterday and I shorted the open today. But the next big question is how low will it go?
To answer that from a technical perspective we need to keep in mind the important level of $25. No matter whether it goes down further, which looks very likely, that level will definitely be where the shorts are looking to cover. A perfect double bottom would be obviously at $25.52. Also keep in mind that shorts would likely cover before earnings in order to avoid any unnecessary risk from surprise announcements (like FB announcing toddler accounts !) during the call. Also, the bottom of the channel (in red) was made to make it parallel to the top with only the June low serving as an anchor. This is not the usual way to draw trendlines but sometimes it gives an early warning of what is to come. It could so happen that the downward trend continues all the way to $23.5 instead of bouncing back from the $25.52 level. And the most unlikely scenario would be the stock cut through all these and move straight towards the $20 level. This is extremely unlikely before the earnings but if the earnings dissapoint (the already depressed expectations) then FB could really touch 20$. But for now I will keep a sharp eye on the $25 level and cover at the slightest pretext. Only extremely bearish candlestick moves would pursuade me to keep the position open below $25.
Also, keep in mind one thing - you are only trading possibilities, not absolute facts. So always be ready to take cover, run and hide whenever the tide turns against you. No long term promises, no short term losses.
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