Jeff White is a full-time trader in Texas. Blending a technical approach with a thorough understanding of market psychology, money management, and strict discipline, Jeff has enjoyed success in a variety of market conditions since the late 1990's.
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Social media IPO's have proven disastrous for many in 2012, with Facebook /quotes/zigman/9962609/quotes/nls/fb FB -5.40% being the leader of the losers.
Sure, some stocks have fared well in the space (such as LinkedIn Corp. /quotes/zigman/5131883/quotes/nls/lnkd LNKD -0.07% up 71%), but the group in general has suffered, to say the least. Among those in the red, few have performed worse than Facebook — at least on such a grand scale.
The pre-IPO hype continued far too long leaving the offering oversubscribed to begin with. Throw in some technology glitches which prevented a smooth opening, and it's not very surprising that the stock marked its highs on day 1 and has seen virtually nothing but disappointment ever since.
With current prices sitting at roughly half of the initial offering price, it's a tempting spot for those underwater to add to their holdings in an effort to reduce their basis. The daily chart also shows prices having stabilized over the past two weeks, raising the question of whether or not a lasting low has finally been found.
The answer to that remains to be known, as time will tell, but technically this is not yet an opportunity to declare a low. Sufficient proof has not yet been provided that a turn is imminent, and in fact, the bears present a stronger case in terms of the technicals.
Since May 18th, Facebook has created several lower relative highs (June 22, July 9, July 19, August 7). Bounces have each been sold as holders have raised cash, and additional supply has come onto the market with the first lockup expiration having arrived August 16th.
The coast is far from clear though, as several more lockup expirations are scheduled, freeing up more than 1.8 billion shares over a 9-month period. That's a lot of supply for the market to absorb.
To state the obvious, the expectation for higher prices is the big reason for buying any stock. On the chart, that's depicted with higher highs and higher lows. We want to see dips getting bought, not bounces getting sold. Facebook has yet to offer either one.
To see a pause near the lows does not in itself suggest that prices are headed back up — it simply points to short-term equilibrium between buyers and sellers. The trend is still down, and we've yet to see the positive change of character which could shift the path of least resistance back up.
In order for Facebook to reverse its trend from down to up, it would need to create a higher high by eclipsing the August high at $22.45, then create a higher low on a subsequent pullback by holding above the current low of $18.75. That sort of two-steps-forward, one-step-back price action has been nonexistent for the stock, at least for the past two months with a steady slide since late June.
The bottom line here is that Facebook has a lot of proving to do before a lasting low can be confirmed. With a downtrend still in place and many more shares due to come onto the market in the coming months, it's very much an uphill climb, and therefore still not yet time to embrace the stock.
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