Chart of the Day – The Shifting Moods of $FB

by Enis March 15, 2013 10:36 am • Commentary

I feel like Facebook is a stock I’ve traded for years now, but it hasn’t yet reached it’s 1st birthday as a public company.  It’s been a volatile 10 months, though.  A headline-filled start, followed by a dramatic 50%+ drop in just a couple months, then total disgust, then a renaissance, followed by renewed euphoria, only to be followed by renewed disappointment.  That’s why it’s felt like I’ve traded it for years.

Price action always matters more than volume, but volume can often give clues to how the chairs are shifting on deck.  Facebook is a perfect example of this.  Here is the lifetime chart with my annotations on the volume panel below:  

[caption id="attachment_23712" align="alignnone" width="628"]FB lifetime daily chart, Courtesy of Bloomberg FB lifetime daily chart, Courtesy of Bloomberg[/caption]

Though FB stock had a terrible month after its IPO, the volume did not really expand until the stock approached and then breached the $20, with large volume taking place in August.  When I see large volume like after a stock has already declined 50%, I’m thinking capitulation.  However, buying on capitulation after such a severe multi-month selloff is not usually the best setup.  Because, in these situations, it takes months of trading to transfer the shares from weak hands to strong hands

(Sidenote:  this is why we have only taken short-term bounce attempts on AAPL.  Even if the stock is close to a bottom, it will probably be in a basing process for months.  In the meantime, we can get a better sense for buying and selling aggressiveness, and have more information for a good long entry.)

The better setup is to let the stock build out a base.  In Facebook’s case, that happened in Sept and Oct, and by November, we had 2 separate instances of kick-off volume days.  While the first was rejected, it was the first sign that buyers were becoming more aggressive, and the selling was close to over.  The second kick-off was an even better signal, coming so close to the first, and off the same 18-20 area once again.

That was probably the best long entry, in late Nov.  The stock had a nice uptrend from there until January.  In January though, even though the stock was approaching the 33-34 area that was resistance in spring 2012, traders were clearly getting euphoric.  The call/put ratio was hitting records multiple days in a row, and volume was expanding AFTER the stock had rallied 60% in a few months.  Similar to the capitulation case in August where the stock volume expanded at the end of the run, the euphoria case ended similarly, in the opposite direction.

Today, I continue to see FB stuck in a range between 25 and 30.  Unfortunately, implied volatility in FB has been low, so the risk/reward on range trades have not been great.  I haven’t pulled the trigger as a result.  But the lack of volume, tight range, and lack of headline interest indicates a stock likely in the doldrums for now.