If we were uppity and boastful, we’d say something like, ‘It’s all unfolding exactly according to plan.’ But those words feel more like a comic book villain’s than our own. So in order to avoid coming off two-dimensional and making a laughingstock of ourselves, we’ll just say that we’re still that same group of chipper, brilliant prognosticators you always knew, and you’re damned lucky we don’t charge you more for the service.
That said, we’re of course talking about Facebook, and their extraordinary fall from grace last week, a development that we’ve noted in the charts for the last three months, that we’ve recently written no less than three trades on, and that today we intend to profit from like a pack of mad British bulldogs in the noonday sun.
So take that, Hieronymous!
For those who missed it, Facebook shares tumbled some ten percent last week, and we’re not waiting to see if there’s any more to come. We could just as well see a bounce after a cliff-dive like that, so here’s the wind-up. We hope you paid heed and were in on it.
The first trade was launched on August 16th in a letter called Media Perfidy. There, we urged you to sell the FB December 135 CALL for $3.00 and purchase of the FB January 105 PUT for $2.88. Credit on the trade was $0.12.
The PUT is fetching $1.12 and the CALL $0.43, and even though you may be hankering to hold out for more, we say why bother? Sell the former and buy back the latter and you net $0.79 on absolutely nothing laid out. Adjusted for minimal commissions, that’s a 427% take in less than 90 days.
Next on the Facebook Profit Express was our September 27th initiative. The letter was entitled Keel Haul the President! and in it we recommended buying the FB January (2018) 115 PUT for $10.75 and selling the FB January (2018) $145 CALL for $11.00. Total credit on the trade was $0.25.
And what happened?
Nothing short of a night of latex and Cool Whip with Lady Gaga.
Today the PUT trades for $12.10 and the CALL for $7.40. Sell the former and buy back the latter, and you come away with a hefty $4.95 – again, on no initial expenditure!
That’s a clean 3200% take in six weeks.
Ribald, Jimmy! Absolutely Ribald!
Finally, we turn to our letter of just a week ago, called Hillary Dumping Arsenic in Orphanage Drinking Water, in which we again loaded up our plates with Facebook failure. The letter implored you to buy the FB November 25th 126 PUT for $2.69 and sell the FB November 25th 134 CALL for $2.81. Total credit on the trade was $0.12.
And today the doors are blown wide open.
The PUT trades for a walloping $5.90 and the CALL is demanding just $0.10. Sell the former, and as much as it beckons to leave the CALL to rot, don’t do it – buy it back! Your take on the trade is an unbelievable $5.92 – and you expended precisely nothing to get it.
That’s 3847% after adjusting for commissions.
Charting a Bigshot’s Decline
The chart of Facebook (NASDAQ:FB) is worth another look, because her technical structure today points to weakness ahead – if not immediate, then certainly over the next couple of months.
Take a peek –
This is two years’ worth of chartitude for the company, and it clearly shows the rising wedge we alerted you to back in August (in red), along with last week’s subsequent break below the lower trendline (blue circle).
Reminder: the rising wedge is a bearish formation always, and is extraordinarily reliable. A break below the lower trendline may not produce a long term bear market in the stock, but it certainly signals a coming counter trend decline – if not a full on intermediate trend reversal.
The steep break below their respective waterlines by both RSI and MACD indicators (in green) also indicates we’re likely in bear mode for a while.
Finally, the dive below the 137 day moving average is also important, because that line, according to our studies, is the sine qua non support/resistance indicator (see blue box enlargement). Any move below that line generally results in a sustained decline, while a move above usually brings on the bulls.
Unless we see an immediate retake of the 137 DMA, we expect continued bearish activity for the stock.
The Added Importance of Facebook
Long time readers know that we at Normandy place great weight on the action of FB shares. We’re on record as saying that Facebook is the ‘poster child’ of this nearly seven year bull market, and that as Facebook’s fortunes go, so, too, go the rest of the equity universe.
So is this the end of the road?
Have we reached that inglorious moment of surrender, when no one any longer wants to be part of the Wall Street wonder game?
We can’t say for sure, but we find it hard to imagine.
- For one, sentiment levels are extraordinarily weak, and Main Street is still afraid to pony up its cash.
- We’ve also yet to see the banks and brokerages run the way they normally do at the peak of an equity bull market. Until, for instance, we see Goldman Sachs (NYSE:GS) soar to Geppetto-Land, we’ll remain skeptical of any report of a top.
All the same, we could very well see a short, sharp dive in the broad market in coming days following Facebook’s lead.
As for a trade for the week, we’re going to stick with the world’s greatest time-waster and write the following –- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew