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Facebook: Proceed With Caution

David Pinsen profile picture
David Pinsen


  • On Wednesday there were two potentially bearish indicators for Facebook. The first, noted by Karl Eggerss, was a potential double top in the stock.
  • The second, noted by SqueezeMetrics, was a 3.4x spike in the volume of dark pool shorting of Facebook shares.
  • We elaborate on both indicators and present two ways for Facebook longs to add downside protection.

Two Reasons For Facebook Longs To Be Cautious

The first reason for Facebook (FB) longs to be cautious is the candlestick chart above, shared via StockTwits by Karl Eggerss of Eggerss Capital Management. As Eggerss suggests, this chart could be the beginning of a bearish technical formation known as a Double Top Reversal.

Perhaps not coincidentally, shortly after seeing Eggerss' chart on Wednesday, we received the automated email below from SqueezeMetrics:

Hey there,

Looks like there was some unusual dark pool activity in some of the tickers you follow.

FB had 3.4x more dark pool shorting than usual.

Dark pools, for readers who may be unfamiliar with the term, are private exchanges where institutions trade shares without the transparency of public markets. This enables them to place large block trades away from front-runners and other predatory traders on public exchanges. Seeking Alpha contributor SqueezeMetrics elaborated on how dark pools work, and why investors should pay attention to them, in an article a couple of months ago, Seeking Alpha In The Dark.

After seeing that email from SqueezeMetrics, I signed on to their site and pulled up the chart below. The red part of the histogram represents the volume of dark pool shorting, and you can see how that spiked on April 13th.

Adding Downside Protection To Facebook

If you're long Facebook and are still generally bullish on it, but you want to limit your downside risk in light of the reasons mentioned above, we'll look at two ways of hedging it over the next several months below. If you'd like a refresher on hedging terms first, please see the section titled "Refresher On Hedging Terms" in this previous article of ours, Locking In Gold Gains.

Hedging FB With Optimal Puts

We're going to use Portfolio Armor's iOS app to

This article was written by

David Pinsen profile picture
I developed the hedged portfolio method of investing at Portfolio Armor, and I run a Marketplace service at Seeking Alpha based on it called Bulletproof Investing.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (34)

David Pinsen profile picture
ICYMI, here's an update published today: http://seekingalpha.co...
Double top reversal?? FB defies the charts again. But it may be a good idea to buy some puts after a couple days run-up as the gap is likely to be filled as happened in Feb.
OUCH! That's called a short squeeeeze!
David Pinsen profile picture
Looks like it.
Michael Clark profile picture

See trading Buy Signal for FB.


It IS time to shortsell Goldman Sachs however.
David Pinsen profile picture
Thanks for sharing, Michael.
Michael Clark profile picture
You're welcome, David.
Consider the following, perhaps as a supplement to any long position you may already have in FB:
With FB at 109.64, the Sept 95/105 call spread could be bought for less than 7.00

With the collar strategy, FB would have to rise to 125 to make 14% profit
With the call spread, FB would only have to be at 105 to make 42% profit.
Thanks for the lesson. Wow I thought the "research" I have been doing with regards to the percentage of shorts to total stock issued was for real! HA HA. Should have known right?
SqueezeMetrics profile picture
Love seeing the dark pool data put to good use!

And net profit on a collar that caps me at 22% annualized gain? If only everything worked that way.
Or maybe its a pocket pivot. IBD traders from CANSLIM school will be familiar with this term.
Or it is a classic CANSLIM cup and handle. All in the imagination of the beholder.
David Pinsen profile picture
There does seem to be some subjectivity in technical analysis, which is why I wouldn't have written this article based on that chart alone. But getting the dark pool shorting alert on the same day seemed noteworthy.
I guess it is a Danish-modern cup - the edge of the handle is straight up vertical.
David Pinsen profile picture
Certainly looked that way after hours.
The DeltaAviator's View profile picture
I am not accusing our contributor of fear mongering, but my investment horizon is very long FB, provided Zuck and company continue to innovate and monetize to support the growth rate.

I do not think using a collar strategy or buying Put protection is necessary for the average investor if you are LONG. Why tax your account purchasing options that deteriorate their time value even if you sell other options to reduce the cost of the purchase? It is a drag on your return. If you as an investor are that much worried about FB, then sell so that the rest of us can add to our positions more cheaply please!

Personally, I combine technicals and fundamentals to trading and investing..

A quick look technically at FB.. sorry I cannot ad charts here so I'll give dates of significant price changes for navigation.
If you look at FB's one year chart for example, one will see it follows a fairly well defined channel from lower left to upper right.. Understand that FB, the stock, has a Beta of about 1.4 which means the FB stock price will exceed the overall market in price movement by more than one.
If one looks at the major price dips, August 2015, January 2016, and February 9, FB breaks the 150 day moving average and on 2 occasions, breaks the 200 day moving average. Every one of those points have been beautiful buy points. Look at the strong high volume buying on each of those price recoveries. Those are gift buying opportunities.

I would say that we may be headed for another dip in FB, buy don't fear it. See it as opportunity. The short positions hidden in the dark pools sounds scary, but its those very shorts who launch the stock price back up dramatically after every significant price dip. They need to cover and the rush to close is demonstrated with the high and sustained volume on each recovery.
Besides, you have know idea what the duration of the short sellers are...one week, until after earnings, or 6 months.
I added yesterday below $107 knowing that we may go down a few more percentage points. I did not want to let that opportunity pass by. I plan to hold through April 17 earnings and beyond. I look forward to an extension of the channel.
David Pinsen profile picture
Thanks for the comment, deltaav8tor. You make some valid points. Regarding the case for hedging in general, see the results of the JP Morgan study we referred to in a previous article ( http://seekingalpha.co... ) which found that 40% of US stocks since 1980 had suffered catastrophic declines of 70% or more without recovering. And with respect to hedging cost, note that the hedging cost of the collar shown in this article is actually negative.
The DeltaAviator's View profile picture
I understand that the strikes you've placed to construct your collar have a negative cost.. but I as a long holder I believe FB will be much higher than $125 by September 2016.. I would risk being called away with capped profits. Further, I do not anticipate any 16% drops in FB unless a horrible market event were to occur...which would create another buy point.

I appreciate your statistics, but I wouldn't place FB in that 40% stereotype. I don't have the personal time to dive into researching that particular stat, but I would bet that of that 40% of stocks that do not recover after a 70% drop did not have the fundamental growth history or future growth plan that FB does.
I trade technically, but I keep in mind that fundamentals drive the technicals.
David Pinsen profile picture
If you think FB has a good chance of going higher, and you wanted to hedge, I would suggest setting your cap higher. We didn't set the cap on that one with the primary goal of eliminating cost, but to capture the potential upside suggested by (in this case) Wall Street's median price target.
14 Apr. 2016
Excellent article and perfect timing due to my wife and I arguing over the last two days about buying and going long on FB. Had it only come out several hours earlier I might not be in the dog house.
David Pinsen profile picture
Thanks, M1k3. Sorry it wasn't published earlier.
very enlightening, I learned a lot by reading that...
David Pinsen profile picture
Thanks, kaizenical.
Have the fundamentals of the company changed, at all? Interesting take
David Pinsen profile picture
Thanks. I guess we'll find out if the fundamentals have changed at all when the company reports later this month.
Thanks for the view from a technical analysis and suggested method of hedging. It's always an interesting read even if doesn't sound favorable to us longs.
David Pinsen profile picture

Thanks for the comment. Your open-mindedness should serve you well in your investing.
FB will be around for a very long time ... I have no concern .
Now there is no reason to push through to new highs,.... FB has always had to prove earnings performance, and population growth, and time spent on site, first...I fully expect to see positive numbers in all these metrics albeit a slight lessening in rate of growth in MAU/DAU,... but growth none the less.
BillBrown profile picture
Yes, I agree with that too. Advertising continues to be disrupted, and having worked on the client side in digital, I can attest that Facebook properties (including Instagram, etc) continues to dominate the discussion with CMOS and marketing staffs who want to be seen as making "smart bets" and putting targeted advertising where their customers are spending their time (Facebook, Instagram, Messenger, etc). I personally and professionally doubt the ROI and wisdom, but from the CEO down, there is an EXPECTATION that marketers will increase spend on Facebook, even taking the dollars from even much more egregious burning on Twitter and LinkedIn (and I hold the line on SnapChat, which is an UTTER WASTE).
Few if any analysts have clue on the revenue possibilities of FB! Call or write in a FEW YEARS!
advocate devil profile picture
Well please tell us what you know and the how and why
widgets profile picture
No thanks ,i will just hold my position and keep stacking.
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