For only the second time in its nine days as a publicly traded company, Facebook (FB) closed at a higher price than the high of the previous day. Sure, it is only a few pennies. But for a stock getting sold nearly non-stop since its IPO, this counts as progress. More importantly, FB printed a reversal pattern in the form of a hammer candlestick. The long wick shown below is where buyers finally stepped in to pick the meat off the bones sellers left behind. The increase in volume further supports this trading action as a potential reversal.
Source: FreeStockCharts.com
I will not be surprised if today’s low proves to be a sustained bottom. Market makers rolled out options on Tuesday, likely hoping to recover some of the massive losses they suffered managing Facebook’s opening day. After the first day, puts were strongly favored in a 1.33 open interest put/call ratio. Interestingly, traders reached for more calls than puts the following day driving the ratio down to 1.2. Total open interest increased from 193,369 options to 282,257 (You can find options data on Facebook at Schaeffer’s Investment Research). If the result of today’s action drives the put/call ratio down even lower, I will feel slightly more confident that Facebook is about to embark on a rally. If it does, enjoy it while it lasts.
As with all hammers, the pattern is confirmed on a higher close, and it is invalidated by a close below the hammer’s low. An invalidated hammer can create a fresh shorting candidate as the violation prints a continuation of the prevailing downtrend.
(At some point soon, I will write a more complete piece on my thoughts on Facebook’s stock, and how I screwed up the bullish call on Zynga. For now, there are PLENTY of negative voices out there for you to enjoy. Contrarians, take note!).
Be careful out there!
Full disclosure: long FB, ZNGA