649bruno
Short

Facebook: Decline Likely. How To Use Trading Bands

NASDAQ:FB   FACEBOOK INC
60 0 7
In 1983 it was my job as a Quality Engineer to plot control charts for manufactured items. From these charts we could calculate the probabilities of how many defects per million we would experience. This principal of math was pioneered by Walter Shewhart back in the 1920's.
I worked with the Empirical Rule (also know as the 68-95-99.7 rule), which says that if the population of a statistical data set (prices on a chart) has a normal (or random) distribution (spread or variation), then the following conditions are true:
About 68% of the values (prices) lie within 1 standard deviation (sigma) of the mean (rising or falling average );
About 95% of the values (prices) lie within 2 standard deviations (sigmas) of the mean (rising or falling average );
About 99.7% of the values (prices) lie within 3 standard deviations (sigmas) of the mean (rising or falling average ).
HOW DO YOU USE THIS INFORMATION?
Look at the above chart. Facebook-touched the upper band three times and reversed. Why? From a statistical perspective, the chances of FB-going higher at that moment were less than 3/10 of one percent. The upper band represents 99.7% of the "normal" ramdom trading. In other words, 99.7% (plus three sigma) means that FB-will sell lower 997 times out of 1000. From a swing trader's view, these are terrible odds (to stay long).
The same holds true on the bottom band. The lower band is minus three sigma, and the likelihood of an upside reversal are very high.
NOW, HERE IS THE WARNING THE TRADING BANDS ARE SHOWING:
Facebook-is trading in the LOWER half of the bands. It is showing signs of rolling over and reversing trend to the downside. In this case the bottom band will not hold and FB-very well may fall to the next support level of structure, which seems to be $96.
REMEMBER, the trade bands represent normal price action during swings. Currently, the price action in FB-is not random at all. If I were back in Quality Engineering I would be looking for an assignable cause. If FB-does change direction to a new down-trend, the assignable cause will most likely be published and announced. As for now, the chart is warning everyone of pending weakness. In addition to trading in the lower band area, the phase energy is weak, prices are trading below the Ichimoku Cloud , and the Cloud baseline and conversion lines have reversed to the down side.
In my opinion, FB-is heading lower. To be wrong, FB-has to start trading within the bands from bottom to top, not just bottom to mid point.
On a side note, the 68-95-99.7 rule affects all of us each day. Marketing efforts, manufacturing, and surveys, usually use this rule when stating results. In fact, if you take a prescription drug for a disease, the clinical trial math that the FDA uses is a version of the 68-95-99.7 rule called "analysis of variance" (ANOVA). It works like this: If it is thought that a drug works on the disease, then two groups of people are randomly selected. A control group of people (do not get the drug) and a treatment group of people (those getting the drug) are compared statistically. Let's say this drug was to lower blood pressure. If the control group had random variation, but the treatment group had consistent readings at the lower band (minus three sigma), then the assignable cause would be the new drug.
The FDA would see that the lower band readings were caused by the new drug. If the sample size was large enough, the drug very well may be approved.
It really does work! FB-has to have a reason it is trading in the lower band area. I suggest you use the regression setting in Trading View. It may save you from a bad trade. One last note: Using statistics got me out of a lot of garden work. I claimed the plants I touched would die from "square roots".
I hope this has been entertaining and informative. May all of your trades go well. Don.
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