Don’t Chase Facebook Inc (FB) Stock After Earnings. In Fact, Short It.

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FB stock - Don’t Chase Facebook Inc (FB) Stock After Earnings. In Fact, Short It.

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Facebook Inc (NASDAQ:FB) is scheduled to report its latest earnings on Wednesday, May 3, after the closing bell. FB stock has risen by about 10% over the past few weeks, and more than 30% since the January lows. However, while I’m a long-term believer in the Facebook story, in the near- to intermediate-term, this upward trajectory looks increasingly unsustainable.

Beat the Bell: Facebook Inc (FB)The situation calls for a more cautious approach, if not outright short-term bearishness.

The last time I discussed Facebook stock (March 30), I said that shares had good support at their 21-day simple moving average, and that a next pullback to this moving average (at the time in the $139-$140 area) would likely offer a good buying opportunity for a next move back higher toward $146. FB did exactly as we wanted, and my $146 upside price target has been more than reached.

That brings us to our look at Facebook’s stock charts, and our discussion on how to deal with it around its earnings report.

FB Stock Charts

On the multiyear weekly chart, we see that Facebook exhibits an incredibly well-defined uptrend.

FB stock chart weekly view
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The lower end of this uptrending channel is also well-supported by the 50-week simple moving average (yellow), which roughly equates to the 200-day MA.

Through this lens — and from a trend following perspective — FB stock would be a significantly better buy at the lower end of this channel. Note also that the 100-week simple moving average (blue) rests not far below, and has acted as support in 2015.

The most recent rally in Facebook has now pushed it above the upper end of the longer-standing channel, and barring a new major catalyst, FB shares stand little chance of accelerating higher from here before a better consolidation period comes about.

On the daily chart, we see more clearly the 10% rally in FB stock since mid-April and right into this week’s earnings report.

FB stock chart daily view
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Furthermore, note that Facebook shares have gapped higher the past two trading days, and thus in my eye exhibits fairly extreme giddiness as a result of broader chasing in large-cap tech stocks.

The options market is currently pricing in about a $6.50 move in either direction for FB stock following Wednesday’s earnings report. Using Monday’s closing prices, this would target a post-earnings rally in FB stock toward $160 and a selloff toward $146.

From a risk-reward perspective, I would find it especially inviting to “fade/short” a post-earnings rally toward $160 or higher for a mean-reversion move lower toward the $145 area.

Alternatively, a drop in FB after Wednesday’s earnings report could also mark the beginning of a better consolidation period, but in my eyes I would first need to see a weak close on a weekly closing basis. If and when, this could allow for an opportunity to play for a bigger mean-reversion move lower into the $130s.

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