The technology sector has rallied back from the February crash lows with a vengeance, but not all components have participated in that rally. Some, like Facebook Inc (NASDAQ:FB), have been asleep at the wheel, lagging notably. If recent technical patterns are any indication, however, naptime is about to end, and FB stock is going to pop.
Facebook Stock Charts
At $185, Facebook shares are virtually unchanged since last November. That’s five months of churn that has frustrated both bulls and bears alike. But as any good chart reader will attest, periods of volatility compression are often followed by expansion. When strong-trending stocks settle into a range, smart traders watch for signs that volatility is returning. A recent downturn on news that user data was poorly handled could spark a longer downtrend, but Facebook is still a strong company.
Think of FB as a coiled spring, quietly collecting energy for a breakout. The level to watch is $186. It has halted the past three rebounds and is about to be tested yet again.
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The pair of higher pivot lows that just formed suggest buying aggression is on the rise. Couple that with the potential for more strength from the Nasdaq next week and I think an upside break is highly likely. The next resistance zone at $195 is as good a target as any for bullish trades.
A FB Long Volatility Trade
We can use implied volatility to optimize our strategy selection. At 25%, the implied volatility rank (not shown) for FB options is low and likely close to troughing.
That’s because right now, we sit directly between earnings announcements. The last release was about six weeks ago, and the next one will arrive six weeks from now. Since this is the time when implied volatility has troughed in previous quarters, it’s a good bet it’ll do it again.
Buy the May $190 call options for $6.65. You can enter now in anticipation of the breakout or wait for a rise above $186 if you want additional confirmation. The risk is limited to your initial investment, and the reward is unlimited. Consider taking profits if Facebook shares rally close to $195.
Check out Serge Berger’s Daily Market Outlook for March 19.
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As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
