The past few days have had a major trading theme:
- Rotate out of tech and into energy, and
- Rotate out of large cap stocks and into small caps
And after nearly two months of nothing going on... Facebook finally moved.
Is now the best time to buy the dip? Or should we wait for a bigger selloff?
Let's take a look.
Major Technical Levels To Watch
Over the past year, Facebook's price action has been months of boring rangebound action, punctuated by fast breakouts that only take a week or two. If you're a long term holder you're doing fine, but short term traders have been frustrated by the lack of direction.
Key resistance is at 175, and the support that was just broken sits at 165. The next major pivot level is at 155. There is definitely some price symmetry going on.
If 165 isn't retaken sometime soon, then odds are 155 will start to act as a magnet.
Here's another reason why I think that's a good possibility...
The Great Volatility Pivot
Below is a standard deviation plot for the stock.
It looks at how the stock has traded over the past month, and then says how big today's movement was in standard deviations.
That selloff clocked in at a 5 standard deviation move.
Theoretically, that's not supposed to happen very often... but stock price movement doesn't follow a bell curve. Large moves tend to happen all at once, and that's what we are seeing here.
This is a volatility pivot. It means that higher volatility will continue over the short term... both to the upside and downside.
When I see this kind of move, I never treat it as a "one-off" event. Odds are that we haven't seen the final flush in the stock, and we should anticipate for a lower low with a momentum divergence.
Finally, let's take a look at the IWO Turning Point Indicator over a 20 day window:
This shows us the expected price movement over a one month timeframe. Because FB has been in such a strong trending market there haven't been many large moves to the downside.
The first band is at -4.7%. This gives us a nice frame of reference to ask ourselves "what's probable" with the stock price movement.
We'll keep it simple and round down to -5%.
Off of the recent highs at 175, a 5% pullback puts us at 166.25. We've already hit that-- and the reason we don't see it show up here is because the trading window is too long.
Let's now use current prices at 165... a 5% pullback here gets us to 155, which coincides with the key pivot level we've been watching.
How I'm Looking To Trade It
If FB runs to a new lower low, I want to start scaling into bull put spreads, because I know that the odds of further downside will not be as great as what the market is pricing in.
I'll slowly scale in because I know the actual volatility in the stock will be a little higher, so if we get a little loose to the downside I can get better prices and scale out quickly.
Earnings becomes a risk here soon, but odds are this downside move is more of a shakeout of weak hands as we head into earnings. The overall trend is still up, so the longer term buyers can still come in and support price.
When My Thesis Fails
Here's a 30 minute chart of FB price action:
If the stock sees a 30 minute close above Monday's open, then my "lower low" trade idea is invalidated and I should look for a trend continuation trade.
The second way I can be wrong is if FB manages to hold above 166 for a sustained period of time. Remember, market corrections can happen two ways... price and time. And if enough time goes on, it tells us that there aren't enough sellers to take price much lower and we should start looking to play the upside.
Get the IWO Turning Point Indicator
This is my most valuable trading tool. In the options market, you need to consider what's probable and how to structure your risk to earn stable profits.