FB: Bull signal bull-oney

Facebook Inc. (FB) broke above its 20-day price channel on Tuesday, sending a bull signal that was confirmed in trading today.

Long story short: Using Eliott wave analysis, I count FB as having begun a correction of the rise from $17.55 on  Sept. 4, 2012, the low point since the company went public in May last year.

Click on chart to enlarge

FB 2 years daily bars (left), 20 days 15-minute bars (right)

Within that correction, I've counted an A wave to the downside, followed by a wave B retracement to the upside. The B wave has already retraced 61.8%, an often seen endpoint for such movements.

So although in theory the B wave has nearly 10% of upside remaining, in practice, it can reverse at any time without violating Elliott wave doctrine.

The uptrending B wave itself subdivides into three waves -- A, B and C. I show wave A {-1} as being in its fifth a final wave to the upside,  wave 5 {-2}.

Wave A {-1} will be followed by a three-wave decline labeled wave B {-1} and then wave C {-1} to the upside, which will complete wave B, setting the stage for the wave C decline to complete the correction of the rise from June 5.

In brief, I see FB as being in wave 5 {-2} of wave A {-1} within wave B to the upside, to be followed by two downtrending movements, wave A {-2} of wave B {-1} within wave B to the upside.

In other words, the bull signal by my count contains a healthy dose of bull-oney.

This chart is also a fine example of how Elliott wave trends encompass a multitude of lesser trends. A downside correction can contain uptrends that themselves contain downside corrections.

Facebook, headquartered in Menlo Park, California, is the giant of social media. You're on it. I'm on it. Everyone is on it, or so it sometimes seems.

Like most Interest companies, Facebook pays its bills by displaying ads, which account for 80% of its market capitalization.

Analysts are ecstatic, collectively coming down with a 55% enthusiasm rating.

The financials are less impressive, with return on equity a humdrum 10%, given a touch of glitter by the low debt, amounting to 2% of equity.

Earnings hit their nadir in the 1st quarter of this year but have risen in the two ensuing quarters. Upside surprises mark five of the six quarters reported since FB went public, with only one downside surprise, in the 1st quarter 2013

FB's earnings yield is 0.97%, lower than 89% of other computer services companies. The company pays no dividend, so all earnings are retained.

The stock is priced at 103 times earnings and at a steep premium to sales. It takes $17.95 in shares to control a dollar in sales.

FB is priced at speculative levels.

The stock on average trades 44.8 million shares a day and supports an awesome selection of option strike prices spaced a dollar and $2.50 apart near the money, with open interest running mainly to five figures. The front-month at-the-money bid/ask spread on calls is extremely low, at 1.1%.

Implied volatility stands at 42% and has been stair-stepping lower since Oct. 21.

Volatility is at the 49th percentile of the one-month range, having bounced off the month's low set on Dec. 6. That puts it in neutral territory, suggesting that long shares would be the position structure most likely to produce a winning trade.

Options are pricing in confidence that 68.2% of trades will fall between $58.39 and $74.57 over the next month, for a potential gain or loss of 12.2%, and between $62.60 and $70.36 over the next week.

Call contracts today are running 15% above their five-day average volume, and puts at 3% above average.

Facebook next publishes earnings on Jan. 30.

Decision for my account: I consider this to be a bearish chart and won't be opening a bull position in FB. And in fact, the price below the breakout level as I was writing, as downward momentum took hold.

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.