Thursday, May 31, 2012

Is Facebook stock symbol FB- a good buy? Should you buy Facebook?

Facebook had  its IPO few days back. Everyone had a question about its valuation and wether Facebook stock was a good buy. There were all sorts of opinions and views. However the stock started drifting after it was listed and everyone started belieiving that they new FB stock would crash!! Funny markets. In hindsights, most of us believe we are right.

Anyway, Profit from Prices theory has a signal which could have been applied to Facebook stock on the day it was listed. Please read about the signal:

SIGNAL M2: SIGNIFICANT DAY Signal- Applied to Facebook on its Listing day

Let us add one more signal- a very simple signal. There is no complicated mathematical condition to remember. This signal has just two parts.

First, watch for a day of significant importance for the stock you are following. This can be a day that is psychologically important. Let me try to make a list of events that are likely to make a day a Significant Day.

Initial Listing Day: This is the first day when an IPO starts trading. Applicable only to new listings.

• Split Day: When a stock starts trading at post-split rates.

• Earnings Release Day.

• Merger or Acquisition Announcement Day.

• First day of trading post-Merger or Acquisition.

• Federal Reserve meeting to decide on changing Discount/Fed Funds rate (applicable mostly to indices or ETFs, or interest rate sensitive stocks.)

• A surprise global or political event- a big earthquake, a sudden war, a terrorist attack or some significant announcement by the Government.

• A surprise market event- A day of significant development in other markets like a sudden rise/fall in some currencies, gold or a default by a major nation.

This list is by no means complete. In short, a day is a Significant Day when something that is material to a stock is scheduled to happen or there is some material announcement by the company itself.

Once a day is labeled as a Significant Day, its Open and Close prices are very important for us. If the day is Bullish (Close price higher than Open price), one can expect the stock to trade higher over next few days. Similarly if it is a Bear day (Close lower than Open price), a slide in stock price is expected.

Conditions: We have just three conditions for this signal:

1. A day has to be a Significant Day for the stock we are considering.

2. Because it is a Significant Day, there should be a significant increase in Volume on that day. This is also one way of confirming that the day really holds significance for a stock or the market. The more the increase in volume, the more powerful our signal is.

3. If this day turns out to be a Bull Day TDC >TDO, you can buy this stock to benefit from the subsequent upward price movement over the next few days. If this day turns out to be a Bear Day TDC

ACTION: If the significant day is a BULL DAY, you should look forward to buying this stock. If it is a BEAR DAY, you should look forward to shorting/selling this stock.

As you know, Facebook stock opened around 43 on the first day, rose to around $45 but closed at $38. It was a significant day as per condition 1 above. Lot of volume. Condition 2 also met. It was a bear day as the Facebook stock closed lower than Open price! So the action was to sell. As we know what happened to Facebook stock during subsequent few days. Today it touched below $27 level.
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