Facebook’s Friends offer Filthy Lucre! (FB, SOCL, SPY)

Let’s open today with a look at our favorite stock (that we also love to hate), Facebook Inc. (NASDAQ:FB).

We don’t intend to confuse y’all with statements like these. The truth is we haven’t much use for a company like Facebook or its product, outside of course, making money off the stock’s moves.

Yet that said, we also appreciate that Facebook is emblematic of today’s tech-mad, anti-social, fame-crazed world and in accordance with that, we’ve taken the liberty of naming the current bull market the ‘Facebook Market’. And it remains very much our contention that as goes the stock of the world’s biggest time-waster, so, too, goes the broader market. And with that in mind, let’s have a look at the action in Facebook over the last few months.

As the chart below shows, Facebook shares recently went into a steep decline for a good two months, along with the rest of the social media big shot (and a host of other big tech names).

FB526

It seems the time for a pullback in the social media was at hand and investors sold accordingly. Facebook stock fell 25% peak to trough but now looks to be stabilizing.

Stabilizing?

A look at the RSI indicator (in green) shows recent movement above the midway ‘waterline’, that threshold level that marks whether a stock is trending bullish or bearish. And while MACD has not yet confirmed with a surfacing of its own, we see that just a couple of days of neutral to positive action on the stock would serve to bring it above that level. When that happens, we expect to see more intense buying activity.

Two other technical indicators also give us reason to believe the worst is over. First, the gap that opened in late January (in blue) was closed some four weeks ago. That was the sine qua non for a continued advance in the stock, as far as we were concerned and once we had it, we were prepared to urge FB as an out-and-out ‘buy’.

Second, price action was recently ‘scooped’ by the short term moving average (in black), a reasonably reliable sign that we have a northward trajectory ahead of us.

More than that, however, volume also supports the bullish thesis, with a demonstrable bulge in daily trade coinciding with the price bottom in April (in red) and a more recent return to levels that prevailed before the pullback.

AND…

If that weren’t enough, we see that price has once again moved confidently above all her moving averages and that those MAs are themselves all trending higher.

All of which points to a sure-fire continuation of the stock’s exaggerated uptrend from early in the year, in our view.

Social Media Train

It’s impossible to say on an absolute scale what kind of goose Facebook stock will receive in the coming months. Nor do we have to know that figure to make money.

Rather, how big a relative move she makes will provide us all the ammo we need to outperform the market.

That is, Facebook’s climb higher is almost certain to outperform some other sector of the broad market – or even the market as a whole. That’s a conclusion we arrive at both via an examination of past performance and from the latest, steep dip in the internet and social media sector, which now calls for a hefty round of ‘catch-up.’

Here’s the Global X Social Media Index ETF (NASDAQ:SOCL) for the last six months –

socl

SOCL is a fund comprised of both big names like Facebook, LinkedIn, Twitter, Groupon and the like, as well as smaller start-ups. And, as you can see, the last three months have been plain rotten.

The stock fell 30%, peak to trough, but like Facebook above, is now showing signs of life.

To which –

  1. The bounce off the long term moving average (yellow line) is a constructive indication,
  2. The move through the down-sloping trendline (in red) is likewise positive, and
  3. The increased volume into the early-May bottom is also indicative of an intermediate trend reversal.

Finally, the short term moving average also looks poised to ‘scoop’ price – though we’re still a few days away from anything conclusive there.

In short, it appears that Facebook’s friends will likely be tagging along for the next run to new highs.

But why won’t the broad market outpace Facebook?

The exaggerated dive we saw from Facebook and friends did not correlate with a deep retreat in the broad market. Yes, the NASDAQ suffered somewhat, but the rest of the market’s losses were rather shallow and everywhere we look we see the indexes well on their way to a full recovery.

Have a look here –

sandp526

The S&P 500 is now back at the highs it set just two weeks ago, and the Dow’s not far behind.

  • We’ve had full-on bullish action from both RSI and MACD indicators for three and a half months (save a one-day blip in mid-April).
  • We have a bullish ascending triangle formation (in red) that could give us a breakout as early as Monday’s open.
  • And price is climbing above all the salient moving averages, all of whom are also unfurled and trending higher.

But it’s the scope of activity over the last several months – the range of the S&P’s price action – that most interests us.

With 1900 as the high and 1820 as the low, we’ve had a market that’s been bound in a 2% range, higher and lower about the 1860 level since mid-February. And that’s astounding – particularly when measured against stocks in the social media group.

And it’s precisely for that reason that we’re setting up a trade that pairs Facebook’s friends with the S&P 500 – long the former and short the latter. Because it’s nearly impossible for us to conceive of a broad market push to new highs that’s not outdistanced by that group.

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Wall Street Elite recommends the following trade for your consideration – buy the SOCL September 18 CALLs for $1.25 and sell the SPY September 199 CALLs for $1.28, for a total credit to you of $0.03 per round traded.

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Wall Street Elite recommends the following trade for your consideration – buy the SOCL September 18 CALLs for $1.25 and sell the SPY September 199 CALLs for $1.28, for a total credit to you of $0.03 per round traded.

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With kind regards,

Hugh L. O’Haynew
Senior Analyst
Normandy Research

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