Monday, September 16, 2013

FB hits the mark

Facebook Inc. (FB) has met my basic criteria for a trade. It has hit my mark. Whether it really is a trade, however, requires a closer look.

On July 28, in "FB: No trade",  I wrote:
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.
That great moment arrived on Sept. 11, 2013, in the half hour beginning at 1:30 p.m. New York time, when FB for the first time since it opened on its initial public offering day, moved above the $45 mark. True, it drew back before the half hour ended, but it had climbed the peak and planted its flag.
FB 16 months daily bars

In the last half hour of trading that day, FB moved above $45 and stayed, closing at $45.05, and in the first half hour of trading the next day, Sept. 12, it hit a its highest high since the IPO, $45.62.

From there the price began to falter. It pierced $45 to the downside in the 11:30 a.m. half hour, but then rose above that level, continuing that pattern of decline followed by upward retreat until the next day, Sept. 13, when it fell below $45 in the second half hour of trading. There it has stayed ever since.

A lot of people bought FB shares in the opening-day excitement of the IPO. And clearly, a lot, having held on for more than a year of paper losses, are happy to get out at the break-even point.

The question I must now ask as a trader is whether FB is likely to challenge the $45 level again, the next time with success.

The stock's price hit an all-time low of $17.55 on Sept. 4, 2012, a bit short of four months after the stock went public.

Using Elliott wave analysis, I count FB has being in the third wave of an uptrend (the Arabic numerals in the chart).

FB 30 days 2-hour bars

Using lower case Roman numerals for the count within the larger-scale waves, I count wave 3 as undergoing its internal wave v. That means that wave 3 is on the road to completion, to be followed by a correction of the rise since wave 3 began on June 6 from $22.67.

Looking within smaller scale wave v to an even smaller scale, I count the wave as complete, with five waves: (1), (3) and (5) to the upside, and two corrective waves, (2) and (4) interspersed. I'm using arabic numerals in parentheses for the smallest scale count.

The decline since wave 5 peaked at $45.62 is sufficient to mark the start of a correction.

Based on the Elliott wave count, I conclude that FB has exhausted its upside potential for now.

I say that with a caveat: Elliott wave counts are an art, not a science.

Even the grand master of Elliott wave analysis, Robert Prechter, changes his counts readily when the markets provide fresh evidence that invalidates his previous conclusions.

A move above $45.62, the wave 3 peak, would suggest that my count was wrong, although not conclusively.

For my own trading, my conclusion is sufficient to keep me out of FB at this point, but I'll continue to keep an eye on it.

The odds analysis for FB is not promising. Since the present major wave up began in September 2012, it has completed six bull signals. Two were successful, with an average profit of 25.7% over 26 days. Four, however, were failures, losing 8.7% on average over 15 days.

The win/lose yield spread is still quite good, at 17%. However, FB will have to do some work to improve its odds before it becomes an attractive trade.

Facebook, headquartered in Menlo Park, California, is a social media web site -- a distant descendant of the pre-Internet dial-up bulletin boards and the early Internet's Usenet and other discussion systems. It reports having 900 million active users -- for advertisers, that 1.8 billion eyeballs for ads, and 78% of FB's price results from ad revenue.

Ask the many analysts who follow Facebook, however, and they'll tell you that the company is awesomeness epitomized. Collectively, they come down with a 73% enthusiasm rating, which is extremely high.

It can't be the current financials that are causing all of the excitement. Facebook reports a rather pedestrian return on equity of 7%, with long-term debt amounting to 15% of equity.

It has reported earnings for five quarters, and all have shown a profit. There's not yet a trend to earnings, but the most recent quarter was the most profitable to date, exceeding the prior high set in the last quarter of 2012.

Four quarters have surprised to the upside, and one, the 1st quarter of this year, surprised to the downside.

Institutions have yet to jump on board the Facebook bandwagon. They own only 47% of shares. Yet the price has been the object of a speculative frenzy. It takes $17.64 in shares to control a dollar in sales.

FB on average trades 64.7 million shares a day, sufficient to support a wide selection of option strike prices spaced a dollar apart with four- and five-figure open interest at the strikes I would use to construct a trade.

The front-month at-the-money bid/ask spread on calls is quite narrow, at 0.4%.

Implied volatility stands at 39%, in the lower half of the six-month range. It has been declining since Sept. 12.

Options are pricing in confidence that 68.2% of trades will fall between $38.80 and $48.70 over the next month, for a potential gain or loss of 11.3%, and between $41.37 and $46.13 over the next week.

Trading in options is running a bit low today, with calls at 85% of their five-day average volume and puts at 93% of average.

Facebook next publishes earnings on Oct. 21.

Decision for my account: I won't be opening a trade in FB today, for the reasons given in my chart discussion, above. A move above the wave 3 high of $45.62 would prompt me to revisit the stock with an eye to opening a bull position. Meanwhile, FB remains on my watch list.


My 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. StockCharts has a good explainer. The principal practioner 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

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.

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.

No comments:

Post a Comment