Shares of Facebook (NASDAQ:FB) had rallied over 11% in the past month after making local lows in early October. Facebook stock, though, is beginning to struggle following an earnings report that was good, but not great.
While EPS and revenue beat, daily and monthly average user growth continued to be somewhat lackluster for the third straight quarter. Regulatory concerns still swirl as well. Look for an overbought and overvalued Facebook to pull back from current lofty levels over the coming weeks.
Facebook stock is now trading at its highest multiple over the past month with a P/E over 31. It is also nearing the valuations at 32.4 that have been a sign of short-term tops in the past. Further multiple expansion looks unlikely for FB stock and should provide a significant headwind for additional gains.
Facebook stock is getting decidedly overbought from a technical perspective. The 9-day RSI is fast approaching overbought readings that have marked significant short term tops in the past.
Bollinger Percent B is poised to pass 100 on any further rally. MACD is also reaching extremes as well. Momentum, however, is failing to confirm as it continues to flounder. FB stock is trading at a large premium to the 20-day moving average which has inevitably led to a pullback to the average in the past.
More from the FB Stock Charts
Click to Enlarge There is major overhead resistance at the $197.50 area. Facebook stock once again traded up to that level yesterday before subsequently pulling back over 2 1/2 points. This type of reversal pattern is many times a sign the rally is reaching a climax, especially with FB stock at major resistance and had such a strong move higher. The buyers have become exhausted and the sellers have taken charge.
Interesting to note that Facebook stock has put in a significant intermediate-term top following each of the previous three earnings reports, as highlighted in the gray boxes in the chart. In each instance, FB stock moved sharply higher immediately after earnings only to fall further once the earnings euphoria faded.
Expect a similar pattern with lower prices in the offing on the heels of the latest earnings release.
I had a bullish viewpoint in my previous post on Facebook stock from Oct. 1. FB was oversold and undervalued as it neared major support at $175 and was likely due for a bounce. This indeed proved to be the case with Facebook adding on 20 points since then. The red hot rally, however, has turned my previous bullish outlook into a short-term bearish one — because price ultimately does matter. FB stock is now overbought, overvalued and due for a drop.
Bottom Line on Facebook
Stock traders should look to short Facebook stock on any further strength, especially given that earnings have passed. An initial downside profit objective would be a move back to the 20-day moving average at the $187 area. A meaningful breakout past the overhead resistance at $197.50 would make for a viable stop out point.
Current IV is at only the 14th percentile, meaning option prices are comparatively cheap. This favors long volatility strategies when constructing trades. Option traders may want to go long the FB Dec $190 puts and sell the Nov $190 puts for a $3 net debit.
The maximum risk on the put calendar is $300 per spread. Ideally Facebook stock closes near $190 at November expiration on Nov. 15. The trade structure allows for additional selling of weekly options against the long December puts to further hedge the risk if needed.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.