Tuesday, June 26, 2012

FB: Testing boundaries

Facebook Inc. (FB) is testing the boundaries of the $33.21 high set four days into trading, the first higher high after the three-day plummet from its $45 IPO opening down to its $31 third-day close, a decline of 31% that no doubt left many people unhappy.

In looking at FB, I consider the 4th day of trading to be the first meaningful day. The first three days were distorted by computer problems at Nasdaq, hurried price support from the IPO managers, and an "OMG! Fire!!" rush to the exits by the trendy get-rich-quick crowd.

What has happened since May 23 has been the establishment by FB of a trading range. From the $33.21 high, the price declined in an orderly fashion down to a low of $25.52 on June 6.

It has since climbed back above $33, and the last three days (including today so far) it has set highs of $33.45, $33.02 and $33.44.

What this means for me as a trader is that FB began an uptrend and has now hit resistance. A decisive break above that resistance (call it $34) means FB is still in an uptrend. A retreat means a sideways trend.

FB is trading above the fair-price range of the past five days. That range contains 68.2% of trades surrounding the most traded price, $31.77.

I give analysts a 20% enthusiasm index, an analytical method that assigns positive weight to Strong Buy recommendations, negative to Hold, Sell and Strong Sell, and ignores Buy.

Decision for my account: I'm still interested in FB because I think the price will rise significantly over time. I don't intend to open an unhedged bull position until there's an upside breakout above $34. I would also consider a hedged bull position, such as a diagonal or covered call, if I could structure it so that my initial basis was $25.50 or lower.

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.

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