Trade Recommendation: Facebook

Recap of the three most significant technical developments leading to our initial technical coverage of Facebook’s stock (see May 15’s note for details):

  • The March 19 down-gap caused by reports that the company could have been involved in privacy violations and potential political manipulation (Cambridge Analytica Data Scandal – white ellipse in Figure 1).
  • The April 26 stellar 1Q18 earnings report (orange ellipse).
  • The stock moving higher and trading within the range of prices preceding the Data Scandal (bearish K-Divergence range – violet horizontal trendlines).

Figure 1. FB Daily Chart

Technical Developments since May 15:

  • As predicted in our note from May 24, NASDAQ was poised to retest its 2018 high (achieved 8 trading sessions later). Facebook’s stock also moved higher during the period, supported by its 8 EMA (purple line). As previously discussed, the 8 EMA often supports fast-moving markets. In FB’s case, the 8 EMA served as a support since the company’s earnings beat on April 26 (orange ellipse).
  • On Tuesday (June 5), the stock retested the $195 level at the open and moved lower during the trading session (yellow arrow). The stock underperformed most of its peers on this day as NASDAQ pushed decisively above its all-time high. This was the first sign that the stock is faltering at the upper range of the bearish K-Divergence range (upper violet horizontal trendline).
  • Today (June 7), the stock broke below its 8 EMA.
  • Also, during today’s decline, the stock broke below a short-term support (green trendline).

Outlook

  • Bearish as long as the stock is trading below the upper boundary of the bearish K-Divergence Range (upper violet horizontal trendline at $195.32).
  • Neutral with a bullish bias above $195.32.

Trade Recommendation

  • Short the stock at current levels ($188.18 at EOD on June 7).
  • Target: Half at $177 (confluence of long-term MAs – 100 & 200 SMA – not shown). Half at $170 (the base formed after the 1Q18 up-gap).
  • Stop: A close above $195.32.

Disclosure: Long put position with a short-term expiry. Not recommended in this note as it would require quickly closing the position under specific circumstances (i.e. may not be able to publish an update before the stock has experienced a shift in short-term outlook).

Featured image courtesy of Shutterstock. 

Author:
http://www.linkedin.com/in/konstantindimov