Shares of Facebook (NASDAQ:FB) are running into some serious resistance near the $200 area. Facebook stock has been on a monster run since finding a floor at $160 in early June. FB has rallied 25% over the past five weeks and now sits at the highest level in a year. While the selling had gotten overdone earlier, the buying is now reaching a similar climax. Which makes now the time to “unfriend” an overbought and overvalued Facebook stock.
Certainly FB stock is no longer cheap from a valuation viewpoint. The current price-to-earnings ratio is fast approaching 30 and nearing the highest readings of the past 12 months.
The last two times Facebook stock carried such a lofty multiple proved to be significant intermediate-term top in the stock. Other metrics, such as P/S and P/FCF, are also nearing extremes.
Facebook stock is also getting extended from a technical take. Its nine-day RSI is over 70 but finally weakening. The MACD reached a recent extreme before also softening as well. Bollinger Band Percent B exceeded 1, a reliable indication of a top in the past. Momentum has turned sharply lower after peaking at the highest level of the past year.
Facebook stock is also trading at a large premium to the 20-day moving average, which has preceded pullbacks in the past. The earnings gap from last July has been closed almost entirely, which is also a negative. All in all, a decidedly bearish outlook on the technical front.
Facebook is due to report earnings July 24 with expectations for $1.90 in earnings-per-share on $16.4 billion in revenue. The whisper number , or earnings that the insiders really think will be reported, is $2.01.
The last four earnings reports have been less than stellar. I expect a similar quarter out of Facebook once again. Given the rich valuations, it will take a big earnings beat to take Facebook stock higher.
Stock traders may look to short FB stock anywhere above $200 with an initial downside target near the 20-day moving average of $193.
Implied volatility is high in front of the earnings release, meaning option prices are expensive. Option traders looking to take advantage of high prices may want to consider selling an out-of-the money bear call spread that expires July 26.
Facebook Stock Trade Idea
Buy THE FB July 26 $217.50 calls and sell THE FB July 26 $$215 calls for a 45 cents net credit.
Maximum gain on the trade is $45 per spread with maximum risk of $205. Return on risk is 21.95%. The short $215 call provides a 6.77% upside cushion to the current $210.35 of FB stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
