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Time to Friend Facebook Stock as FB Nears Major Support

More attractive valuations and improving technicals should help FB head higher in the comimg weeks

Shares of Facebook (NASDAQ:FB) have been under some pretty intense selling pressure over the past several days. Facebook stock is now down 12 points after reaching $190 on September 20. Some of the drop was overdue given the relatively high valuations and ongoing concerns swirling around Facebook. The selling has now come too far, too fast however. Facebook stock is a buy on any further weakness.

The most recent weakness in FB stock was was due to the news last week that the Department of Justice will likely open an anti-trust probe into Facebook. This follows on the heels of similar previous probes by the FTC, House Judiciary Committee and the New York Attorney General Office. Nothing meaningful has come out of any of the previous inquiries and I expect the same in this instance as well.

Facebook stock reached oversold levels on a technical basis. 5-day RSI breached the 20 level before turning higher. MACD is below -1 and nearing readings that have coincided with lows in the past. Momentum turned higher after reaching recent lows. FB stock is trading at a big discount to the 20-day moving average which has been a precursor to a pop in the past. There is major horizontal support at the $175  level.

FB stock price action yesterday was encouraging. Facebook stock was briefly negative before reversing to close higher on the day. This type of reversal pattern is many times emblematic of a low in the stock. The sellers have finally become exhausted and the buyers are in control. It is even more powerful given that FB stock had fallen nearly 8% over the past six days after reaching the recent highs near $190. It is more pertinent considering the reversal took place at a major support level. Expect FB to hold that support and head higher from here in the near future.

In my previous commentary on Facebook stock from July 15, I thought FB was a sell anywhere over $200. Facebook looked overvalued and overbought to me. That proved to be the case and Facebook has fallen 12% since then.

Price changes things, however. The lofty 35 P/E ratio that Facebook carried back in July is now a more realistic 30. The combination of a earnings beat and lower stock price serves to compress multiples. Price to sales now sits at near the lowest levels ever and at a big discount to the 5 year average. Facebook stock is starting to look attractive at current levels.

Investors looking to add exposure to one the giants of the social media space should consider buying Facebook stock anywhere near the present price. An initial upside target would be the 20-day moving average at the $185 level. A break of the recent lows near $165 would be a viable stop out level.

Option traders may want to look at  a bull call spread to target the $185 area. Earnings are due the end of the month so best to have the options expire before then to avoid any earnings related risk.

Option Trade Idea

Buy Oct $180/$182.50 call spread for $1.10

Maximum risk on the trade is $110 per spread with maximum gain of $140. Potential return on risk is 127% if Facebook stock closes above $182.50 on October 18.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at 

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