Here’s How to Profit from Facebook’s Pain

Earnings season hasn’t been kind to social media stocks. And that’s putting it lightly. Snap (NYSE:SNAP), Twitter (NYSE:TWTR), and Facebook (NASDAQ:FB) were all taken to the woodshed after reporting disappointing quarterly results. Snap led the destruction with its share price plummeting over 25%. Though FB stock and TWTR fell less, the lot of them look terrible and are candidates for bear trades.

A person using the Facebook app on a smartphone
Source: Wachiwit / Shutterstock.com

Today we’re zeroing in on Facebook shares to chronicle the ongoing trend reversal and build out an intelligent options strategy to profit from continued weakness.

Zuckerberg’s flagship is being battered from a trifecta of bearish forces: sentiment, fundamentals, and technicals.

The steady drumbeat of negative headlines is souring sentiment. Ever since former Facebook employee, Frances Haugen, revealed a treasure trove of company documents showing how much company leaders knew about the platform’s potential for harm, there’s been a great deal of scrutiny heaped on Facebook.

Souring Sentiment and Fundamentals

Negativity currently commands investors’ minds, so much so that Facebook is looking into renaming the company. Time will tell if their attempts are fixing their image will rescue their sinking share price.

For now, the PR crisis has would-be buyers looking elsewhere for tech exposure. And, honestly, with so many other quality choices in the tech space, who can blame them?

On the fundamental side of the equation, the freshly released earnings report wasn’t impressive enough to rescue the sinking share price. While the company beat on earnings per share, delivering $3.22 versus expectations of $3.19, it fell short on revenue: $29.01 billion versus $29.49 billion expected.

What’s more, its revenue forecast also came in below consensus estimates. Company CFO David Wehner explained the outlook “reflects the significant uncertainty we face in the fourth quarter in light of continued headwinds from Apple‘s (NASDAQ:AAPL) iOS 14 changes, and macroeconomic and COVID-related factors.”

The one theme tying together the dreadful performance of social media companies this earnings season is Apple’s April update to its mobile operating system that gives users the ability to stop sharing their data or have it tracked. The change has seriously hampered advertisers’ ability to target ads, ultimately leading to less ad revenue for companies like Snap, Twitter, and Facebook.

FB Stock Charts

Facebook (FB) weekly stock chart with 50 MA test
Source: The thinkorswim® platform from TD Ameritrade

The damage suffered by Facebook created a steep retracement on the weekly time frame. Prices are down 20% from the peak. We’re now testing the rising 50-week moving average, which has been an area of support in the past. After seven straight down weeks, a bounce would be a good thing – even if you are bearish.

The benefits are two-fold. First, it will allow prices to work off the oversold signals. Second, it will create a lower-risk entry point for new trades.

The daily trend shows prices trending lower beneath falling 50-day and 20-day moving averages. This week’s post-earnings slide also pushed FB below the 200-day moving average for the first time since March. So while I’d love to pile on with bearish positions here to bank on the 200-day moving average break, the odds of a bounce are staying my hand.

Facebook (FB) stock daily chart with downtrend.
Source: The thinkorswim® platform from TD Ameritrade

Ideally, we’ll return to the $330 zone and then see a lower pivot high form. This would signal bears are rejecting yet another rally. At that point, I like purchasing put spreads, such as the December $330/$310.

Right now, the spread is trading for $11, but it should drop below $10 if FB stock makes a run to $330.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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