Shares of Facebook Inc (NASDAQ:FB) lifted another 8% over the past week and a half, pushing it to fresh all-time highs and to a stunning year-to-date performance of 43%. Now traders and investors are looking forward to the July 26 earnings report, from which I think the next good trading opportunity could arise.
As a reminder and so you know, I am a bull on Facebook as a company as well as its stock price through the intermediate- to longer-term lens, and the nearer-term trading ideas in FB stock have little to do with my longer-term fundamental view in the company.
A large part of why many traders and investors have a difficult time making money even in staunch bull markets like we are enjoying presently is because they are not defining their time frames and thus don’t have the necessary perspective through the lens of risk management — i.e. they get stopped out or take profits too early or too late for their time frame.
The key theme in FB stock to me at present is that it trades well above its up-trending channels in both the longer- and nearer-term time frames, and thus any further rally, especially an up-gap following next week’s earnings report, would be an opportunity to “fade” the stock, i.e. play it from the short side for a “trade” once buying exhaustion gets verified.
FB Stock Charts
On the multiyear chart, note that the upper end of the up-trending channel has been violated and FB stock now trades notably above this channel.
Through the lens of a longer-term trend-following approach, this current juncture presents a better opportunity for at least partial profit taking as opposed to layering into new long positions, as mean-reversion or “gravity” is a powerful thing and ultimately stands a good chance of pushing FB stock back into this price channel (red parallels).
To be clear, however, in this time frame and from a trend-follower’s perspective, this does not mean FB stock has to be shorted as much as booking some profits is simply sound risk management here.
On the daily chart, we can draw a similar channel that defines the stellar year-to-date price action. Note that the stock is also trading at the very upper end of this trading range while implied volatility (black line at bottom of chart) has moved higher in recent weeks as next week’s earnings report approaches.
So, what’s the trade?
Regardless of whether FB stock rallies or falters after next week’s earnings report, from a trading perspective odds favor shorting the stock or putting on bearish options trades such as selling out-of-the-money call spreads. Through that lens, the setup into next week’s earnings report smells similar to the setup into the May report; following its last earnings report on May 3, FB stock began to stall and “corrected” about 6% and, more importantly did not meaningfully push past those early May highs again until two months later.
In other words, selling the stock, taking partial profits or putting on bearish options positions worked well last time around and has for years each time FB stock reaches a similar spot technically, as laid out on the two charts here.
I’ll be hosting a special webinar Wednesday, July 26 for InvestorPlace readers to explain in detail how earnings season can provide wonderful trading setups in stocks such as Facebook and allow traders to profit form for winning monthly and quarterly income trades.
Check out Anthony Mirhaydari’s Daily Market Outlook for July 21.
Take Serge’s quiz to find out which trading strategy best suits your personality.
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