My Trading > My Trading Journal > August 19, 2012

My Trading Journal

August 19, 2012

6:45 pm (PST)

Since Facebook stock has dropped from about 35 down to 19, it has become oversold, which puts it on my radar for stocks to look at. A few weeks ago I posted that the stock was worth about 19, so the stock is not currently undervalued - even though it is oversold.

The interesting thing about the chart (see below) is that the stock just convincingly broke below the previous support level of 20.

So if the stock continues to drop, it will be come fundamentally undervalued, as well as severely oversold, which is the perfect setup for a swing trade. The obvious question is "what price will the stock drop to before it bounces?". On my trading IPOs page I point out that "the lack of trading history [with IPOs] means there is no support and resistance levels on a chart". This is the situation with Facebook stock right now. I am not sure where the stock is going to bottom out. To answer this question, I look at the chart above and I basically just eyeball it and try to imagine what price level it will drop to based on the volatility of the stock in the recent past. Based on it's volatility, I can see the stock dropping to the 14-17 area. It should be noted that I am only referring to the bottom that the stock will hit on this partiular down move over the coming 2 to 10 days - not where the stock is going over the enxt few months (let alone the long-term). Below, I create a table of general probabilities of where the stock will drop to.

  • 17.00 - likely (70%)
  • 16.00 - maybe (60%)
  • 15.00 - maybe (40%)
  • 14.00 - probably not (20%)

The probem is, though, that 14-17 is a pretty wide range. In this case, I think I will probably scale into the trade. I think I will buy in half of my position at 16, and the other half at 14 or 15. Normally, I don't do this, but I would probably do it in this scenario since: (1) the stock is volatile (2) and it doesn't have any trading history below 19.

If I do buy it, then next question is, "How far will it bounce after it bottoms out"? Over the past month, the stock has been making 10% swings over 4 to 5 day periods - so that is the minimum I think it will boune back. The most the stock may bounce would probably be 20-30% over 2 to 3 weeks. It may make a move back up towards 30, but that would be considered more of a new uptrend, rather than merely a "bounce-back". In general, the sharper a stock jumps back, the more quickly I am to sell it. If I get in at a low enough price (around 15-16), I think I would be happy with closing out the trade for a 10% gain if the stock jumped that much in 1-3 days. If the stock moved up more slowly, I might be willing to look for a 15-20% gain over 5 to 10 days.

9:22 pm (PST)

The Gap (GPS) stock is making one of the best chart set-ups that I know of. It a pattern where there is:

  1. A large 1-day move in a certain direction.
  2. Then a 5-day (or so) continuation of small moves in the same direction without any kind of pullback.
  3. Then another large 1-day move in the same direction.
This pattern is useful if it comes on the tail end of a trend and represents a sort of blow-off top. In the case of The Gap, the stock had already gone from 18 to 30 before making the move from 30 to 36 with this pattern.

I haven't ever named any of my personal chart patterns but I think I may start, just for the sake of clarifying and classifying my chart patterns and trades. This pattern is called the "1-5-1" pattern. You can view a model of the pattern below, and the pattern on the Gap chart below:

The fact that the Gap stock is fundamentally overpriced makes this situation almost a must-trade. I'm not sure if I will short the stock and look for a 3-to-5% gain in a few days, or write a call credit spread. Here are some of the call credit spread profit opportunities for the weekly, September, and December options. October options will being listing tommorow I believe. The option premiums seem really high. The 38/39 Sep call spread is about 6% out-of-the-money (equal to a 288% annualized move), but it pays you 24% profit. An at-the-money (ATM) call spread pays you about a 90% profit for 1-month.

weekly 36/37 0.37 57.0%
weekly 37/38 0.12 12.7%
September 36/37 0.48 89.8%
September 37/38 0.29 40.5%
September 38/39 0.20 24.7%
December 36/37 0.48 91.6%
December 37/38 0.39 63.4%
December 38/39 0.32 46.6%

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