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Facebook Inc Is At Risk of a Correction — Trade It Now!

Facebook stock - Facebook Inc Is At Risk of a Correction — Trade It Now!

Source: Shutterstock

You might like Facebook Inc (NASDAQ:FB), but it’s as good a time as any to unlike Facebook stock considering its less-than-friendly trend in the making.

Wall Street investors may have had a couple reasons for selling Facebook following the company’s quarterly confessional at the end of January. At the end of the day or actually a couple days after reporting results, a headline-grabbing earnings and sales beat may have succumbed to items like in-line and shrinking monthly average user growth or a one-time hit to earnings due to the 2017 Tax Cuts and Jobs Act. Or maybe not?

One could also point fingers at the broader market in taking down FB stock. The fact is shares of Facebook were looking quite defiant in keeping up appearances as the S&P 500 shed it’s initial 4% over the course of a week.

It wasn’t until Feb. 5 when the major indices sank violently on inflation fears that FB quickly aligned itself with the “risk-off” sympathy trade.

Alas and now that the world of investing is safe once again or maybe just decided its brief spasm of cautious behavior was an equally terrific buying opportunity; it’s okay to let bygones be bygones.

But I’d like to caveat that flexibility by warning readers of new price developments in FB stock that may have longer lasting bearish implications.

FB Stock Daily Chart

Source: Charts by TradingView

After a spectacular 2017 that saw Facebook stock reassert its uptrend with increased price tenacity and gains in excess of 40%, 2018 is off to a concerning start. Since reporting earnings at the end of January, shares of FB have rejected an initial bid to fresh all-time-highs and moved into a corrective move of roughly 14%.

Corrective moves like Facebook’s can be healthy price disruptions as excessive optimism is reduced or removed altogether. In turn, this can lead to shares being in a stronger position to rally as sidelined investors look to reinvest or risk being left out if the stock begins to move higher. But corrections come in all sizes and sometimes even lead to bear markets.

And after a five-year-long bull run with nary a corrective move of more than two months in duration; this month’s price break is concerning.

Bottom line, prior trend support is now setting up as a bear flag against resistance. And given what’s been expressed, it’s our view this increases the odds of the current price pattern turning into something a good deal less friendly for today’s bullish investors.

Facebook Stock Bear Put Spread

Given our view, Facebook stock is at risk of a larger correction and after reviewing Facebook’s options, one favored combination for positioning is the April $165/$150 bear put spread. Verticals like this reduce and limit risk by selling an equal quantity of long and short put contracts.

With FB stock at $177.36 this vertical is priced for $2.15 and keeps the trader’s exposure to less than 1.25% of the more open-ended risk associated with shorting shares.

Lastly and with just over two months of calendar life, the quick-to-develop bearish canary on the FB stock price chart could turn into a huge profit center with a gain of up to $12.85 if a 14% correction turns into a slightly more menacing full-blown bear market in Facebook shares.

Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.

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