FB: No trade

Big excitement on the Facebook Inc. (FB) chart on Wednesday after the close, as the company announced earnings that came in more than double analysts expectations. The stock responded with a 27% opening gap on Thursday.

So why am I not betting the farm on FB? Or even my virtual FarmVille holdings?

1. Back in October 2012 I wrote about the FB chart's structure: Two zones that contained the price except on those few occasions when it broke free and moved from one to another. See "FB: A gap, but not a quantum leap".

FB from 5/18/2012, 2-day bars

Thursday's upside gap carried the price to a level just slightly above the top of the upper zone, within which it has been trading since November 2012, with the exception of a non-quantum sag into the lower zone from May into July 2013.

2. Friday's post-gap trading failed to set a new high, which means it failed confirmation under my rules for post-earnings bull signals. If a stock breaks above its 20-day price channel the first trading day following an earnings announcement, I need on a subsequent day to see the price break above that immediate post-earnings high before I consider the bull signal to be valid.

In the case of FB, that confirmation level is $34.88. Still waiting.

3. FB is still far below its all-time high set the day it went public: $45 on May 18, 2012. I sort of, kind of want to see that level pierced before I get excited about this stock.

4. This is FB's seventh bull signal since it started trading publicly. Of the completed signals, one was profitable, earning 8% over 24 days. Five were unprofitable, on average losing 9.8% over 15 days. These are not the sort of historical odds that I play.

Decision for my account: I'm not trading FB yet, even if this breakout is confirmed. I want to see a new all-time high, above $45, before I'll consider it, and also a marked uptrend with better than even odds of success.

I look at it this way. If FB is another Google, then I'll have plenty of room above $45 to make my fortune. And if it's not, I'll avoid a heavy dose of disappointment. Win-win. Definitely.

References

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

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.