In early October, I penned an article about the negative sentiment surrounding Facebook
(NASDAQ:FB) and how stock pricing tends to account for what investors know and understand. Sounds easy enough, but truth be told, it is much more difficult to rationalize as an investor amidst price swings and high volatility. But for the sake of education, let’s look back on what we knew while the stock was “feeling” heavy and in the doldrums. (Read Facebook Stock May Benefit From Expectations Game
Two things were very clear:
1. Financial media was down on the stock.
Investors and media were full of spit and vinegar, hating on the stock and treating it like a broken company. But the fact remains that Facebook is still relatively young. Now it’s certainly possible that the company could misstep and go down the wrong path, but investors haven’t seen that as of yet. In fact, mobile ad monetization appears to be on tracking ahead of expectations (and was a big reason for the first spike higher after their earnings were announced). The IPO was a complete debacle, so in short, the stock was (and still is) searching for the right price and valuation (i.e., price discovery). Again, this is based on what we know.
2. Lock-up expirations unleashed large amounts of stock.
Lots of new stock was coming to the market through lock-up expirations. The most recent (and largest) expiration occurred last week, as around 800 million new shares became eligible to be traded. And guess what -- the stock rallied big on high volume. That’s because folks got too bearish and began to think the worst, which is always the best time for the big fish to commence the buy programs.
In full disclosure, I do not currently have a position in Facebook stock. But Facebook has been very good to me. I had one of my best trades this year when the stock followed my bottoming pattern, allowing me to get in around $19.50 and sell 75% of my shares
on the earnings gap up over $24. I added to my remaining shares on the latest pullback and sold those this past week for $22 and change and some additional jingle. I wish I still had those shares, but I never regret making money. I plan to keep the stock on my radar.
Technically, the stock set up well for a tradable bottoming process when it recorded a divergence with the RSI indicator in early September, with a new price low but higher RSI. The four-month rounded bottom is bullish and appears ready to elicit follow through, but that needs to be monitored closely by current investors. Targets include the overhead gap, which appears to be magnetic. Failure to get through the October highs would be a yellow flag.
Trade safe and stay disciplined.
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Editor's Note: Andrew Nyquist is an independent investor based in the Minneapolis area. This article originally appeared on his investing and economics site, See It Market.
No positions in stocks mentioned.
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