How can you spot a selloff like Facebook (FB) early in the day so you can bank profits on the move? Here’s your answer! (September 25, 2017)
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Today I want to look at Facebook ( NASDAQ:FB ). All the FANG stocks basically took it on the chin and elsewhere today. What I want to look at here is not so much what to do next but how to spot this type of opportunity so you can capitalize on it in the future.
The thing about Facebook ( NASDAQ:FB ) as well as various other stocks is, they will take a big downdraft like this, we say it here, we have seen a couple others here, they pale in comparison to this. But before this you can see where the stock fell down on pretty heavy volume. But this is different. If we just look at these you will see all of these various fairly prominent red boxes were above the 50-day moving average, the uptrend continued. Even this one corrected just a few days later, so the uptrend continued.I want to show you how you could tell that this was different, if you were looking for it, and enable you to be able to pounce on this type of thing next time in a short selling side.
There are like 5 different ways that they all kind of combine together and put you on the short side really early in the morning. Or at least get you out of your position early in the morning. I didn’t short this stock today but I did sell it pretty soon right after the open for the reasons that I am going to tell you. Now, I took a small loss because I bought it just last week looking for a rebound. That is the way it was looking, the market is a little bit almost frothy I guess you could say. The FANG stocks are kind of looking for a correction. But shoot, they have been seeming like they are going to do that for quite a while so today turned out to be the day. First thing in the morning I looked at the way the stock traded the open and went, “You know what? I’m out of here.”
So these are the things that I was looking at. First of all, the 50-day moving average; it is a key area where institutions will buy or sell. If a stock that is above the 50, trading sideways like this, forming a nice base, if it falls to the 50 and does not rebound that tells you that institutions are not buying. If it falls to the 50 and then keeps going like it did here, that tells you that institutions are selling. Two different things, the second one is a lot more important than the first, but they both matter. So, this tells you institutions are selling.
Second of all, if we look at the pivot points on this stock the stock actually opened up at S1, the first level of support where you look for a rebound here. If they don’t rebound then you start looking at the second one and you are saying, “Well, what the heck is this thing going to do here?” You can see the difference between the first and the second one is a couple dollars, it is not a big deal. Then between the second one and the third one is about a dollar or so, so it is not that big a thing as far as points go.
With respect to the technical damage that a stock can do these pivot points actually mean something. So we open right at the 50-day moving average and then start trading lower. The S1 pivot point didn’t catch the stock and it kept moving lower. We are going to look at it on an intraday basis here and you can see just right from the get-go the stock gaps down to here, which is about where the 50 is, and then it just keeps going through S2, through S3. Once it falls below S3 this stock is just not coming back.
You can probably find some exceptions to this rule, but if a stock falls from the pivot point, where it opened, all the way through S3 any rally is going to be transient. It is not going to be enough to reverse that whole thing; unless there is some exogenous event, some catalyst for a big reversal, like the market didn’t know this. But this move here tells you that this stock was not going to come back up.
Now, I will digress for just a second. Let’s look at the other stocks. This is Facebook ( NASDAQ:FB ). If we look at Amazon ( NASDAQ:AMZN ), look at S1,2,3 you get the same type of thing. Apple ( NASDAQ:AAPL ), a little bit different. That is why you look at this kind of stuff. It gapped down to S2, tested S3 and then did not continue like Facebook ( NASDAQ:FB ) did, so this is a different thing. Amazon ( NASDAQ:AMZN ) as I mentioned, just kind of kept going. Netflix ( NASDAQ:NFLX ), right through S3 and kept going. And then finally Google ( NASDAQ:GOOGL ), right down through S3 and kept going as well, though, it did get a little rebound.
But the bottom line is, when a stock falls clear down to this level, as long as it is a large cap stock where there is a lot of volume, a lot of trading, that is an indication that institutions are selling. And they are not going to switch from selling to buying in a day. It is just not going to happen. So what this is is a tell for you. It tells you, we have got selling pressure. So you may not want to short this stock but a least you don’t look at this as a buying opportunity. Not here. Now, maybe down here, that is a different story but we are not talking about that, we are talking about here. So, the stock gaps down, keeps going, you have got to just say, “I am not touching this stock. I don’t want to waste my money on it. I don’t want to risk my money on that.”
Also, though, we have to look at momentum. Here is a combination of moving average convergence/divergence (MACD), that is momentum and trend indicator. And then a momentum indicator on a period of 10, it is a little bit faster than the MACD, it is a little bit faster there and this is trending lower. So we actually got a peak in Facebook ( NASDAQ:FB ), you can see obviously where this is and go back to the future on that. But then we see these indicators trailing off. So this is really important to look at the whole thing in the aggregate and you will see that this was actually pretty much a textbook breakdown that doesn’t happen very often. I can’t remember the last time it has happened on Facebook ( NASDAQ:FB ), where we get this kind of continuation and also volume. Very, very high institutions and I am not just talking about here at the end of the day, I am talking about at the open, trading volume was really high.
So you combine high trading volume with deteriorating secondary indicators that had started quite a while ago. And then you talk about a breakdown through the 50-day moving average through all of the S levels and then also a breakdown through this last low, which was at 165.00. So now we are at a situation where today’s move has essentially taken all of these folks that bought here into the losers column, all of them. And so there is so much resistance here that if Facebook ( NASDAQ:FB ) snaps back, and it probably will a little bit tomorrow, just because that is the way stocks trade, it is not easy to make money on obvious moves, it will snap back tomorrow. I don’t know how the stock is going to chew through all this resistance. So I would stay away from this stock on the long side. If the stock does rally up a bit and then happens to fail right around here, I think it is a good setup for a short.
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