The Compelling Case for Buying the Facebook Stock Dip

Traders taking a top-down approach when analyzing Facebook (NASDAQ:FB) over the weekend should have come to the same realization as I. Shares of the social media sultan are ready to buy. In case it wasn’t evident by glancing at the chart, I’ll guide you along in today’s message with why buyers are returning to Facebook stock.

As Free Cash Flow Continues Rolling, So Will Facebook Stock
Source: fyv6561 / Shutterstock.com

I’ve organized my pitch into three sections. First, we’ll look at what the broader tech sector is signaling. Then, we’ll analyze the weekly chart on Facebook. Finally, we’ll drill down to the daily time frame to discover the subtle shift in tone that transpired last week.

Was that the Bottom in Tech?

QQQ Trust (QQQ) showing potential double bottom
Source: The thinkorswim® platform from TD Ameritrade

Given the outsized role the tech sector has played during the recent market mayhem, it should come as no surprise that traders have been begging the market gods for an end to the tech wreck. A finale to the fleeing would signal the bull market is back on, and stocks can resume their rally anew.

Up until last Wednesday, I wouldn’t have held my breath for an end to the selling. But the two-day turnaround that carried us into the weekend was convincing for two reasons. First, it allowed the formation of a double-bottom pattern. Second, we saw an influx in volume signaling institutions might have been wading back in.

Futures rallied over the weekend, and we’re set for a strong gap higher that will confirm and complete last week’s bottoming attempts. It also places QQQ above its 50-day moving average and within striking distance of its 20-day. No matter how you slice it, the bulls are back!

Time to ‘Like’ the Big Picture on Facebook Stock

Facebook (FB) weekly chart showing 20-day moving average test
Source: The thinkorswim® platform from TD Ameritrade

There are two types of corrections. The first is benign and born of mild profit-taking. It is a regular and necessary occurrence that allows an uptrend to go the distance. The second is malignant and born of death-dealing distribution. It breaks support zones and leaves trends shattered.

Though some damage was done on the daily time frame, the past month of selling appears nothing more than a garden-variety retracement on the weekly trend. Last week’s low terminated at the rising 20-week moving average, as well as an old resistance zone. Rather than pushing below both, buyers emerged to defend their turf. The old ceiling has become a new floor. With support successfully defended, I see no reason why we shouldn’t give bulls the benefit of the doubt here.

Of course, a break of last week’s low ($244) would change my mind. But, until then, it’s game on for buyers.

A Daily Bottom

Facebook (FB) daily chart showing double bottom
Source: The thinkorswim® platform from TD Ameritrade

Facebook stock echoed last week’s reversal pattern in the Nasdaq. Zuckerberg’s flagship held support and rallied convincingly into the weekend. The location of support isn’t a coincidence. The $245 zone was old resistance, an unfilled gap, and the prior pivot low. The overlapping of all three zones at one price level makes a compelling case for why buyers would finally emerge.

Monday morning’s rally has so far fallen short of breaking above the 50-day moving average. That will be the tell for me that this bottoming attempt is going the distance.

Implied volatility is high enough at the 37th percentile to make selling bull puts interesting.

The Trade: Sell the Nov $215/$210 bull put spread for 75 cents.

Consider it a bet that Facebook stock remains above $215. If it does, you will capture the max gain of 75 cents. The cost, and max loss, is $4.25. To minimize the damage, you could exit on a break of the $245 support zone or the short strike of $215.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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Article printed from InvestorPlace Media, https://investorplace.com/2020/09/the-compelling-case-for-buying-the-facebook-stock-dip/.

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