Wednesday, October 24, 2012

FB: A gap, but not a quantum leap

Ah, Facebook. First you break our hearts, and then you give a cute little smile, as if to say, "Everything will OK now."

Facebook Inc. (FB) delivered its second earnings release on Tuesday, with earnings per share spot on what the analysts expected. Whereas the first earnings last July produced a 14% downside gap, this week's release prompted a 24% gap to the upside.

I'm going to focus on the chart for this discussion, with no mention of the fundamentals. Everyone knows FB so there's no need to go into it.

The FB chart looks very much like an exercise in quantum physics. If FB were an electron, it would have an upper orbit in the $26 to $33 range (rounding the numbers shamelessly here) and a lower orbit from $18 to $24.

It last moved between the orbits discontinuously, in a quantum leap (or fell in a quantum tumble is perhaps a better description -- "quantumble"?).

(In this discussion I'm ignoring the IPO opening price of $45, which, in our physics metaphor, we can liken to a big bang that quickly turned into a damp firecracker.)

The boundary between the two orbits is the downside gap last July, which carried the price from the top orbit to the bottom..

Today's upside gap failed to carry the price out of the bottom orbit. It hasn't yet moved into the July gap. And after opening, the price quickly began to retrace.

So in terms of the support and resistance levels, the post-earnings performance so far falls short of inspiring a great deal of confidence.

What would make me happy as a trader to the bullside? A break above the floor of the July gap, at $24.54, would tell me something potentially bullish was going on. A move above $26.73 into the upper orbit would  tell me that a persistent upward move was likely in the works.

That's support and resistance. Let's look at trends.

FB has been in a persistent downtrend since it first hit the market on May 18 at $45 per share. It declined to $25.52, the middle of what would later become the July gap, and then began a sideways move that established the upper orbit.

Come July and the first earnings release (which, by the way, beat analysts' estimates by 33%), and the price did its quantum tumble and established a sideways trend that became the lower orbit.

For trend analysis, the question is what has happened since July. The stock's all-time low of $17.55 was hit on Sept. 4. The price rose to $23.37 on Sept. 19, and corrected down to $18.80 on Oct. 19.

So far, we have a starting low, a high, and a lower low. With yesterday's earnings announcement, the price gapped up and for a high of $24.25 -- that's a higher high, and therefore, FB must be counted as having established an uptrend -- a bullish sign.

Finally, Turtle Trading. (See the original Turtle Trading rules here, and my adaptation here.)

Today's gap carried FB not only above the 20-day high of $22.59 but above the 55-day high of $23.37. That would trigger a bull signal under the Turtle rules, with immediate and unconditional entry.

Under my rules, I would enter a half hour after the breakout, which occurred at 10:30 a.m. Eastern. My entry would have come at 11 a.m., at a price of about $22.90. The indicator I use as a confirming signal, the relative strength index, had moved into an uptrend on Oct. 22 and so confirmed the bull signal.

So on the chart, we have two bull signals and one bear phase.

Spoiler alert: I'll tell my decision on my own account here rather than waiting. I have no intention of buying FB.

I went into this earnings announcement with long calls on FB due to expire in November, the remnants of a diagonal spread that turned sour at the time of the July gap. Today's upside gap gave me an opportunity to mitigate the loss, although a loss it still remains.

So I'll be waiting for FB to move back into the upper orbit, above the July gap, before I'm interested in it again.

And this is perfectly fine under my rules. I use Zacks ratings as a gauge of the fundamentals, and choose my stock prospects from among those whose Zacks ratings are aligned with the direction of the signal. Zacks is neutral on FB, so it's not part of my equities pool at this point.

FB next publishes earnings in January.

Decision for my account: I'm not taking the trade.

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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