Shares of Facebook Inc (NASDAQ:FB) fell 1.75% on Wednesday to round off a choppy month for stocks. I fully expect market choppiness to remain a theme for weeks to come, which is why I am looking for quicker trades in both directions; long and short. FB stock as a result of the past two days of weakness may have formed a lower high and a short side trade toward the February lows is setting up.
A big part of my market analysis consist of respecting the positive correlations within stocks as an asset class. While certainly not all sectors and groups of stocks move up and down together in lock step, particularly when volatility rises correlation among most sectors and groups increases.
To wit, when we look at the second chart below, note how it looks very similar to the broader stock indices.
FB Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the multiyear big-picture chart, nothing much has changed in recent weeks for FB stock as it continues to trade above — and in fact right atop — the longer-standing up-trending channel. Another phenomena that stocks tend to hold to is that of mean-reversion, which is to say that after a stock makes too steep a move in either direction (all else being equal), it tends to consolidate either in price (lower/higher) or in time (sideways).
In the case of Facebook, I still think that despite the company’s great growth prospects, ultimately the stock stands a good chance of mean-reverting lower back into the up-trending channel (black parallels) before a new and lasting leg higher gets underway. To be clear, this does however not mean that longer term investors in the stock must now sell all their holdings to buy it back lower. This type of market timing is better reserved for the nearer term players.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
Speaking of more active traders and investors, on the daily chart we see that FB stock earlier this week ran out of steam from its latest upswing and that this area around the $185 mark coincides with an exact 61.80% Fibonacci retracement of the sell-off from the January highs into the February lows.
A simple tactical (quick, multi-day/week) trade thus now is to play the stock to the short side back toward the February lows. Specifically the red 200-day simple moving average (currently around the $170 area) would serve as a well-defined profit target. Any strong daily bullish reversal would serve as a stop loss signal.
Options traders may find long put spreads or even just simple long puts a viable option to express this view.
Check out Anthony Mirhaydari’s Daily Market Outlook for March 1.
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