Bespoke Investment Group had another well-timed chart this morning, focusing on FB short interest since the stock’s IPO. The chart shows the recent drop in FB short interest to its lowest level of the year as the stock has rallied:
We got bullish on Facebook ahead of the lockup expiration in November when the stock was in the low 20’s, anticipating a squeeze after the lockup expired as there were no more sellers left in the stock (Dan traded a call spread on Nov 2nd, though we were a bit early, and ended up with a small gain as a result). Now that the stock has had that squeeze, as evidenced both by price and the fall in the level of Short Interest shown above, where does the stock go from here?
In the short term, I expect the stock to head lower, and here’s the chart to illustrate my thoughts:
The stock had 2 strong impulse buy days (circled in red), one on earnings, and one on the lockup expiration. The stock then showed strong momentum in the RSI (bottom panel) until the last day of November. In December, the stock has been stuck in the $27 – $29 range while momentum has declined (indicated by my green arrow on the RSI), and combined with the low short interest, and the recent 40% rally, I anticipate a move lower in FB soon.
However, those 2 strong buy impulses, and a multi-month basing process, indicate to me that the stock is in stronger hands than in May and June. As a result, I don’t expect a large pullback, and depending on how the stock gets there, the $25 area might be a good level for a long entry.
Regardless, with Facebook still earning very little, and with little corporate history, I anticipate Facebook will continue to trade more on technicals than its difficult-to-assess fundamentals.
Addendum: For those curious, I wouldn’t short FB here even though I think it’s going lower because it’s not a great risk/reward trade. Meaning, I anticipate $2-$3 of downside, but probably risking the same on the way up. I’d rather wait for the long setup to materialize, and maybe look to trade it on the long side.