Stocks lifted on Monday in what was a broad-based relief rally that any concerns around a conflict with North Korea may have been overblown. As such, trading algorithms went right back to what has worked for them all year thus far, i.e buying large-cap tech stocks such as Facebook Inc (NASDAQ:FB).
Yes, plenty of these stocks in my eye remain well overbought through a multimonth lens, but this is once more where keeping perspective on different time frames will set apart winning traders from the rest of the pack.
Aside from letting fear and greed come in the way of profitable trading and investing, the number one reason I have found over the years why so many market participants are not profitable is because they treat all time frames the same. In other words, if they have a bullish view on stock xyz, they are bullish both that day, that week, that month and that year. As a result even the slightest few percentage point drop in the stock unsettles them and stops them out of the trade or investment.
Or, they are so bullish on a stock that they will hold on to it regardless of whether it drops 20% or 50% and turns all trends to the bearish sides, thus getting stuck in a major losing position. All of this can be avoided if one respects that stocks will have different trends in different time frames.
FB Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
To wit, looking at the chart of FB stock above, we see that the multiyear trend is decisively higher. Note that Facebook in July following its earnings report pushed above the upper end of the longer-standing up-trend and that the MACD momentum oscillator at the bottom of the chart is in record overbought territory.
From a multimonth/quarter perspective, FB stock as such and in my eye is hopelessly overbought — not something I would want to buy for an intermediate- to longer-term time frame at these levels. Odds ultimately should strongly favor a mean-reversion move back into the long-term channel before better buying opportunities in this time frame arise.
Moving averages legend: yellow – 21 day
As a reference point, on July 21 in this column I offered that FB stock looked near-term overbought and that following the earnings report, regardless of whether the stock were to rally or falter, one could put on bearish positions for a trade, such as selling out-of-the-money call spreads. FB stock then rallied after earnings and those who put on such near-term bearish positions after the earnings report could have profited nicely.
FB stock has largely moved sideways to marginally lower since then and thus option sellers could have collected some nice premium and profited from a little time decay and the drop off in implied volatility.
As a reminder, stocks can consolidate in price or in time. In other words, they can work off their overbought readings either by moving lower as sellers take charge, or by shuffling sideways as the balance of buyers and sellers evens out for a while and the stock has time to cool off.
After Monday’s rally however, where FB stock bounced off the lower end of its multiweek consolidation phase as well as off the yellow 21-day moving average, a near-term bull case can once again be made. Technical analysts will refer to the consolidation phase in FB stock since its last earnings report in late July as a “bull flag” pattern, which as the name implies has a bullish tendency.
Very simply, if FB stock can clear and hold above $172-ish it could give way to a next leg higher toward $180-$185 as a next upside target. Any strong bearish reversals should be respected as a stop loss signal.
Check out Anthony Mirhaydari’s Daily Market Outlook for Aug. 15.
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