Facebook: Two possible paths to sub 131 over the next few weeks
While FB could completely shatter my bearish bias (in both the market and in FB specifically) in the coming weeks, I do want to be prepared for an even more dramatic drop than we have already seen with FB. Thus, I have come up with two paths that would take FB below 131.
Scenario 1 above sees FB resume the sell off on Monday, 4/2/2018. Wave 1 would be complete with a 38.2% retracement via wave 2 down. Wave 3 would likely take us to/near our target of a price below 131 fairly quickly, then we get a wave 4 which is a 61.8% retracement of wave 3 and probably a small/truncated wave 5.
Scenario 2 sees the bulls continuing their move from Thursday into the next week. We see FB complete a 68.2% retracement of wave 1 taking it all the way up to the 171 range. Then we get a larger wave 3 that drops FB close to the target range. Under this scenario, wave 4 would be smaller at only a 38.2% retracement and again I still see wave 5 as somewhat truncated, though this may not be the case under either scenario.
The way I will play this is with put options. If we see a move on Monday up (and scenario 2 plays out), I will be looking to buy some put options as FB nears 171....options that are one to two months out with a strike price of 140 (ex: May 4 140 put option last went for $2.03, but they would be even cheaper if FB moves up Monday into the rest of the week). Under either scenario, if our target is hit prior to expiration of the option, the option would be worth at minimum $10, and likely significantly more depending how quickly we reach the target. A May 4 option would risk expiring early, so for a little extra, one might consider some of the June options (and I will be looking at these too if FB moves up again Monday).
To me, shorting a stock like FB is not worth the risk. Instead, by purchasing options I limit my risk (if I pick up 1 contract at 2.03, I risk losing no more than $203/contract). On the flip side, my potential gain is $800 or more since a $140 put option would be worth at least $1000 if FB hits $130. This risk to reward ratio is the type of trade that I am looking to enter. If it appears that my analysis is not panning out over the next few days, I will either not enter the trade or I will sell the put option prior to expiration (if a trade was entered), thus recapturing some of my losses.
In the situation where I purchase multiple options (at one or more strike prices), I would plan to sell to cover a portion of my options as FB moves closer to my target.
Please note: Options trading is not for every investor as it is highly speculative and the risk of total loss on any given contract is substantial. The above is just a hypothetical scenario, I may or may not execute any trade, and I'm not recommending any particular trade on this very volatile stock.
Scenario 1 above sees FB resume the sell off on Monday, 4/2/2018. Wave 1 would be complete with a 38.2% retracement via wave 2 down. Wave 3 would likely take us to/near our target of a price below 131 fairly quickly, then we get a wave 4 which is a 61.8% retracement of wave 3 and probably a small/truncated wave 5.
Scenario 2 sees the bulls continuing their move from Thursday into the next week. We see FB complete a 68.2% retracement of wave 1 taking it all the way up to the 171 range. Then we get a larger wave 3 that drops FB close to the target range. Under this scenario, wave 4 would be smaller at only a 38.2% retracement and again I still see wave 5 as somewhat truncated, though this may not be the case under either scenario.
The way I will play this is with put options. If we see a move on Monday up (and scenario 2 plays out), I will be looking to buy some put options as FB nears 171....options that are one to two months out with a strike price of 140 (ex: May 4 140 put option last went for $2.03, but they would be even cheaper if FB moves up Monday into the rest of the week). Under either scenario, if our target is hit prior to expiration of the option, the option would be worth at minimum $10, and likely significantly more depending how quickly we reach the target. A May 4 option would risk expiring early, so for a little extra, one might consider some of the June options (and I will be looking at these too if FB moves up again Monday).
To me, shorting a stock like FB is not worth the risk. Instead, by purchasing options I limit my risk (if I pick up 1 contract at 2.03, I risk losing no more than $203/contract). On the flip side, my potential gain is $800 or more since a $140 put option would be worth at least $1000 if FB hits $130. This risk to reward ratio is the type of trade that I am looking to enter. If it appears that my analysis is not panning out over the next few days, I will either not enter the trade or I will sell the put option prior to expiration (if a trade was entered), thus recapturing some of my losses.
In the situation where I purchase multiple options (at one or more strike prices), I would plan to sell to cover a portion of my options as FB moves closer to my target.
Please note: Options trading is not for every investor as it is highly speculative and the risk of total loss on any given contract is substantial. The above is just a hypothetical scenario, I may or may not execute any trade, and I'm not recommending any particular trade on this very volatile stock.
Trade active:
So far our trading thesis for FB remains intact. Today's move up pushed FB closer to the potential target of $171 (though stopping closer to $167 for a 50% retracement is looking more likely). The somewhat parabolic move up late today does suggest to me that this move will not continue tomorrow morning without an intervening pullback. Additionally, based on my current Elliott Wave count for the move over the last few hours of trading on 4/10/2018, it looks like an extended wave 5 up was formed with the a and b corrective waves being put in as well. I'm looking for a wave C down in the first hour of trading to pull FB back down closer to $162.
I have been and will likely continue to be trading in and out of FB put and/or call options until I get a clear signal that this larger wave B complex is complete and I am confident we are starting a 5 wave down pattern (wave C) to take FB close to $131.
I have been and will likely continue to be trading in and out of FB put and/or call options until I get a clear signal that this larger wave B complex is complete and I am confident we are starting a 5 wave down pattern (wave C) to take FB close to $131.
Trade active:
Well, we got our pull back to $162, but it was only in pre-market trading. During market hours FB did not make the anticipated touch to the trend line, rather it moved up in a further extended wave 5. However, at the end of the day as you can see above it did make the touch. I will be watching the action tomorrow closely to see if this trend line is broken early to confirm my wave count or if FB still has some buyers around to push it even higher. I have updated my proposed wave counts as FB continues to form the B wave. If the above count is correct, it is very possible that the last move of this wave has been formed. Since wave B is a three wave structure, I have denoted the moves a-b-c (in blue). We can see that the move today pushed FB right to the 1.618 extension of the a-b complex. This also corresponds with just over a 50% retracement of the 5 wave down move (which I'm calling the larger wave a (in red)).
I'm not saying wave B is necessarily over and our move toward 131 starts tomorrow, however it is a possibility for which I will be preparing.
I'm not saying wave B is necessarily over and our move toward 131 starts tomorrow, however it is a possibility for which I will be preparing.