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Facebook - Shot Across The Bow - RIP?

Sunday 29 December 2013

One can never read tomorrow's news today, but developing market
activity can give one a higher degree of probability as to what, if not
tomorrow's then what the news will soon be sometime after. Facebook is a case in point. The Guardian ran an article on Friday, the 27th,
giving an author's opinion that Facebook "is dead and buried to teens."
If one were long that stock, the level of concern should run to high
for Facebook has no product, other than a social venue, and
social "values" can change quickly, especially among teens.

Does a market send a message to exit from a position? We say a
resounding Yes! There may be some room as to when, but if there is
some kind of red flag alert, then one should have a set of rules in place
to protect against potential adversity. Is Facebook sending such an
alert? You be the judge.

A little bit of background can be helpful. Almost everyone focuses on price, certainly a key element in decision-making. Not as many focus
on volume, primarily due to a lack of understanding. Volume is the
energy, or lack of energy behind price. Volume reflects two key
elements: supply and demand.

You want to see volume expanding as price rises, the market's way of
acknowledging the effort from buyers is greater than that of sellers.
When price sells off, as in a correction, the level of volume should
decrease. This tells you there is some selling, normal for any
correction, and the decrease in volume says there are less sellers as
price recedes than there are buyers as price rallies.

There are also times when volume appears out of line with market
activity. One such example is a spike in volume. A sharp increase in
volume with a widening of the price range is normal. A sharp increase
in volume with a small trading range in not. It is a message from the
market that something unusual occurred, and the event needs to be
put into a market context.

Here is the article from The Guardian, that ran on Friday, that sends up
a red flag for anyone long that stock, because the message is,
"Facebook is not just on the slide - it is basically dead and buried,"
wrote Daniel Miller, lead anthropologist on the research team, who is
professor of material culture of University College London.

We have no position in Facebook, but the message peaked our curiosity to see if the market were sending its own message. In the markets, as
in life, there are no accidents. It is simply a matter of paying attention
whenever something out of the norm appears.

Before going any further, take a look at the daily chart, below. The
market is the best and most reliable source for information. It sends
out messages every day, and there are always a few days that are
more information relevant than others. Best of all, the info is
available to everyone, at the same time. Do you see any reason why
you may not want to be long Facebook?

FB D2 29 Dec 13

If you could not see what information the market was sending, the next chart explains.

You can see from the next daily chart that there was an unusually
strong volume spike on Friday, 20 December 2013. We may not be
reading tomorrow's news as of that date, but we are definitely reading
some news of what may occur in the near future, and if one wants to
have an edge in decision-making, here it is.

Why should one be on high alert once that specific day? The very small price range is way out of line given the enormous volume effort. Think
of it this way: normal volume effort averages around 85 million per day,
[see bottom of chart]. On 20 December, the level of buying increased
to about 220 million. Over twice as many buyers entered the market,
but the response in price was a very small trading range, and
unchanged from the day before.

The markets are full of logic. If you knew the average number of
buyers were easily under 100 million per day, what would you expect
the reaction to be if the number of buyers all of a sudden increased to
almost 250%? Maybe a strong rally should develop?

What actually happened?

The price range was much smaller than the typical daily range. Why?
Only one answer:


The number of sellers was more than a match for the number of
buyers. Why more than a match? The effort of the sellers not only
stopped the buyers, the selling was so strong that the abnormal level of volume was totally contained. Buyers were unable to push price any
higher than unchanged from the previous day due to the increased level of selling. That raises the next question. Who was doing the selling?

Smart money.

Why smart money? Because the public does not sell in a concerted
effort like that. Why would smart money be selling? Expectations are
for the stock to drop in value, lower than where they sold. But price
continued to rally. Smart money cannot unload [distribute] their
holdings at one time. They need to sell on the way up.

We cannot know what smart money knows, but we can know, for the
most part, when smart money is active because they leave "footprints," like this level of volume that stands out like a sore thumb.

There was a similar volume spike in November. Compare the size of
each respective price range. November's was much larger, in line with
the volume effort. Even then, the market provided important
information. The close was off the high, indicating sellers were active.
The biggest tell was the lack of upside gain relative to the effort, and
that observation was confirmed, next day, when there was no more
upside follow through.

Back to Friday, the 20th, and the huge volume increase.

The next bar was a relatively strong rally higher. What followed? Two
more days of price moving sideways, with closes clustering at the same
level. A clustering of closes is often a balance between buyers and sellers. It can lead to continuation, or to change. There was a red flag
bar four days earlier for context. All that is needed is confirmation, and next day, Friday, price opened lower and did not look back.

All we are doing is reading the market activity as it evolves, based
on established facts. There is no guesswork involved. No one had
"tomorrow's" newspaper, but there was an alert sent out on the
previous Friday, 20 December. This was an edge for the prepared.

As it turns out a new article did appear a week later.

The close from Friday, the 27th, erased the previous three days of
trading, and it also negated the positive rally and increased volume
three days earlier. We had a clue from a week earlier, and the intra
day chart adds more to the next directional move.

How to respond to the information? It depends on what your trading
rules are. If long, and you have profits, one possibility is to take at
least partial profits and close stops on the balance.

The level of the overall market is the highest it has been, except for
the Nasdaq, and this is a Nasdaq stock. The market could be subject to a correction, at any time, so one needs to have their own plan for how
to deal with changing market parameters. Price could rally to new
highs, next week. It does not seem likely, but anything can happen
at any time.

The message is to always be prepared to receive the information
messages the market is sending, each and every day.

FB D 29 Dec 13

The use of intra day charts can sometimes provide more details. The
bulk of the sharp volume increase occurred during the last trading hour, circled, and price barely budged from the previous hour. The message
was clear, for anyone to see and when it happened, in real time.

Mention was made about a clustering of closes signifying balance, either for continuation or change. From balance comes unbalance. Looking at the intra day chart, we put "*" over specific bars, and these bars had
lower range closes. Lower range closes tells us that sellers won the
"battle of the bar," [in whatever time frame]. The widest range bars
had lower range closes, consistently. If there is a degree of balance
between bus and sellers, and you see sellers are "winning" the battle,
would you surmise buyers or sellers were in control?

The way to respond all depends on your own rules for the developing

FB 60m 29 Dec 13