Time to give Facebook a chance?

The social media stock has lost more than 60% of its inflated IPO price.

By Minyanville.com Sep 5, 2012 4:24PM
It wasn't all that long ago when the hottest of the hot IPOs made its debut in faceplant fashion. Yes, I am talking about Facebook (FB), the fanciful yarn that was touted as the IPO you had to get a piece of.
Now that the stock has lost more than 60% off of its overhyped and inflated IPO price, is it time for you to seriously consider stepping in? Technically the answer is not yet, and that’s true even as Zuckerberg pledges to hold on to his shares. The time is, however, drawing near, and understanding what to look for is critical to making money in this stock.

Realistically, there's not much of a chart to work with yet; technically there is only a little over three months of data to examine. But even so, when using the daily and weekly charts, one can see evidence of confirmed ABCD projections of $13 and $15, which isn’t all that far away anymore.

Now Wall Street and the investment banks are notorious for churning out paper -- sometimes good, sometimes bad, and sometimes horrible. That is their job, after all. They get paid to paint lipstick on pigs when necessary and this indeed was a pig in more ways than one. Overvalued, overhyped, and oversubscribed. Yeah, tell that to those who have already lost 50% of their investment and look to lose even more before this busted baby bounces.

(Source: investools.com)

As for the bounce, how will you be able to tell when it is time to stick your toe in the water? Well, the best way is to let it bounce then retest with fewer sellers than were seen at the lows. That's the ideal and best way to trade it. For those that like to feel superior to the market, the other trade set-up is to try and time the first bounce. It is possible if you focus and are willing to take a couple of jabs with tight stops when set-up appears. I'll quickly show both cases using a different stock that recently did just that: Netflix (NFLX).

(Click here to see the Netflix chart.)

As I said, timing the first bounce is the most difficult trade and is usually not as rewarding. But for thoroughness, here is that trade. What you are shooting for is a quick two or three day spike encompassing a 10% or more gain. In the case of Facebook, what you want to do is to combine the ABCD down price projections of $13 to $15 with the two-bar reversal set-up. How would that look?

Here is a daily chart of Netflix demonstrating the set-up. Prior to the set-up, Netflix had lost about 50% of its value in a beeline fashion over a seven week timespan. The first bounce bottom was a classic two-bar reversal pattern where, after an extended move, price undercut the prior day's low, then reversed back up, leading to a quick 10% move.
The two-bar reversal set-up is a difficult trade, though. I say that because you can spend several percentage points trying to catch the trade and potentially lose interest and money in doing so. In my opinion, it far simpler to let the first bounce take place then wait  -- wait for the anchored support zone to form at the lows. Doing this provides you with a much better opportunity to potentially profit in a much larger way. Waiting gives you an anchored support to measure a subsequently retest against. Being able to measure supply and demand at critical points on the chart is what neo-classical technical analysis is all about. In the case of Netflix, that retest occurred with absolutely no volume comparatively. That was a clear signal to buy with a very low risk entry and a high probability of success. In this particular case, it led to a 30% to 40% gain in about three to four weeks.
Facebook will most likely provide a similar opportunity when the sellers are done. In fact, I would be very surprised if a 30% to 40% retrace trade doesn't set up as result of the endless pressure currently being witnessed and the disgust that is building towards the stock. Just be patient and let it set up properly first -- then pull the trigger.

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