Tech stocks, the belles of the ball, are faltering. Gravity-defying leaders Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) are suffering their largest down day in weeks today. But it’s Facebook (NASDAQ:FB) that’s really catching my eye. So far today, Facebook stock is already down 2.5% and reaching a new four-month low.
The Nasdaq‘s pain shouldn’t be surprising though, should it? Apple was up eight days in a row and flirting with the stratosphere. Surely some profit-taking is warranted after such a relentless rise. The nature of this morning’s action should be keeping bulls optimistic, however. While the tech-heavy Nasdaq is down some 1.2%, The Dow Jones Industrial Average and Russell 2000 are essentially unchanged on the day. Far from being widespread distribution, so far we are seeing mild sector rotation.
Now, to Facebook stock. Ever since July’s infamous earnings slip-up, FB stock has been the anti-Apple, falling while the magical fruit has been flying. This week’s break of the $170 support level signaled danger was ahead and, sure enough, today Facebook shares are getting smashed. With the stock now deeply beneath all major moving averages it has undoubtedly entered the bears’ den.
But, as the stock becomes increasingly oversold, it’s worth keeping an eye out for potential support levels which may spark the inevitable snap-back. Take the $161 zone for instance. It’s just begging for buyers to defend its reputation. It’s been tested multiple times over the months as support and resistance. Additionally, a drop to $161 will officially fill the earnings gap from late-April.
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Remember, gaps, once-filled, have a tendency of becoming support. While there aren’t any guarantees, this is as logical a level as any for would-be traders to watch closely. If buyers emerge, a bullish trade is worth a shot.
Profit from Facebook Stock’s Pain
This week’s slide is causing quite the stir in FB stock options. The implied volatility rank has jumped from 37% to 63%, and that makes option premiums officially ripe for the selling. For those willing to start picking up bullish exposure here, consider selling a bull put spread.
The October $145/$140 bull puts should do the trick. Consider them a bet that FB will sit above $145 at expiration. The initial premium of 50 cents represents the max reward. The max risk is $4.45. To minimize the loss, you could exit on a break below $145.
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.
