How to Trade FB Stock After the Stampede

by Serge Berger | January 31, 2014 8:02 am

How to Trade FB Stock After the Stampede

Social media giant Facebook (FB[1]) on Thursday staged an epic rally — thanks to its stellar fourth-quarter earnings — that also has notable technical significance for FB stock.

beatthebell 185x185 How to Trade FB Stock After the Stampede[2]On Wednesday after the close of trading, Facebook reported fourth-quarter 2013 earnings that blew most analyst estimates away. FB handsomely beat both on the top and bottom lines — earnings came to 31 cents per share vs. 27 cents estimated, and revenues of $2.59 billion topped expectations for $2.33 billion. But what really had many FB stock analysts and traders talking was the explosion in these numbers on a year-over-year comparison.

On that front, EPS were higher by a stunning 82% from the same quarter last year, and revenue came in higher by 64%. What’s more, in the fourth quarter, the website’s active users grew by 16% to 1.23 billion and mobile active users mushroomed to 945 million.

The takeaway is that the company’s user growth continues to top estimates in a seemingly unstoppable manner. On top of that, the company significantly beat in revenue and profitability, which quickly put away some investors’ concerns about the company’s business model.

That set in motion a day of extremely heavy trading in FB stock, and shares closed Thursday more than 14% higher to leave a bullish breakout behind on the charts.

When I last discussed the state of FB stock[3] a little more than two weeks ago, I pointed to a stock that was in consolidation mode on both its 12-month and near-term charts. I furthermore pointed to a narrowing trading range that provided weak odds for a successful trade before the earnings announcement (at least for most traders with time frames of more than a day).

Trading FB Stock

Fast-forward to today. With Facebook stock having broken out in violent fashion, FB again sits at fresh all-time highs. Through the 12-month lens, there are now a couple of ways to trade the stock:

  1. Get long FB stock on the back of Thursday’s breakout and stay the trend until it breaks. At what point would the trend break? In the near-term, with the newfound upside momentum in the stock, a retreat of more than half of Thursday’s rally (i.e., a drop below the $57.50 area) would be concerning.
  2. The options table presents some interesting opportunities, particularly for investors looking at selling out-of-the-money credit spreads, either well above the current price of the stock using calls, or well below using puts.

fb 12 month How to Trade FB Stock After the Stampede
Click to Enlarge

And a quick look at the daily chart reveals that FB stock before the breakout earlier this week nicely held its 50 day moving average (yellow), which in retrospect confirms Thursday’s rally as valid and significant.

fb daily1 How to Trade FB Stock After the Stampede
Click to Enlarge

Like what you see? Sign up for our daily Beat the Bell[4] e-letter and get investment advice delivered to your inbox every morning!

Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here[5]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  2. [Image]: http://investorplace.com/hot-topics/beat-the-bell
  3. last discussed the state of FB stock: http://investorplace.com/2014/01/fb-stock-charts-rally/
  4. Beat the Bell: https://order.investorplace.com/?sid=FQ8104
  5. clicking here: http://www2.marketfy.com/l/15492/2013-10-08/5htq5

Source URL: http://investorplace.com/2014/01/fb-stock-facebook-stampede/
Short URL: http://invstplc.com/1nv6anB