Shares of Facebook (NASDAQ:FB) had a great run in 2019 and rallied right into their late-January 2020 earnings report. The stock then promptly got hit following the earnings report.
This post-earnings down-gap from Jan. 30 increasingly points to somewhat lower prices for the stock and sets up a clearly-defined reward-to-risk trade for active investors and traders.
Before looking at this trade idea today, allow me to say a couple words around the broader risk-on stock chase that continues in a few mega-cap tech stocks:
Global central banks since last fall have reentered the market with massive stimulus that once again propelled the most obvious risk assets higher. As a result the two largest U.S. mega cap stocks now have a combined market capitalization larger than that of the entire German stock market. While in my eyes that is nutty and unsustainable, in the immediate term it can continue for a little longer. The problem of course is that once it ends, it will do so abruptly and without warning.
What does all of this have to do with shares of Facebook, you ask? As you will see on the following charts, FB stock looks primed for somewhat lower prices in the near-term. The risk to this trade is that the in-discriminant buying of mega-cap stocks also refocuses on Facebook stock and thus quickly invalidates the trade setup laid out below.
Facebook Stock Charts
For perspective let’s start off with the multi-year weekly chart. Here we see that FB stock’s steep ascent in 2019 and subsequent breakout in early January 2020 pushed it above horizontal resistance.
This ‘breakout,’ however, did not last for long. Investors voted to sell the stock to marginally below the breakout point following the January earnings report. Through this lens, the question is whether the January breakout was indeed a ‘fake-out’ move.
On the daily chart we see that FB stock gapped lower on Jan. 30 following the earnings report, but then began to rebound for a few days as the broader market found a bid again. On Feb. 11, however, Facebook was faced with an analyst downgrade and the stock dropped close to 3%.
What is notable about this is that where Facebook stock found resistance on Feb. 10 was the mid-point, i.e. 50% retracement of the late January selling spree. Thus, the stock may indeed have put in a near-term lower high on Feb. 10 versus its late-January highs.
Trading FB Stock
Active investors and traders could now look to either short FB stock around the $207 – $210 area with a next downside target at $200 and possibly followed by the mid $190s.
The best part about this trade is that we have a very well defined stop loss at the Jan. 10 highs just shy of $214. Any break above there is a no-brainer stop loss signal.
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