Buying the Break Out in Facebook

• Posted by Greg Harmon
• on September 8th, 2014

Two things standout to the naked eye in the chart of Facebook below. The first is the smooth rising trend since August 2013. This has been a strong stock. Many might shy away from the stock now as it has moved away from the trend. But a quick measurement in February of this year shows that it has been as high as $20 over that trend line. It is only $11 above it now.

The second thing that stands out is the current Cup and Handle formation (maybe since I highlighted in yellow). This piece is more relevant to the current situation for the stock. That is because with the current trigger on the pattern these is a target of 96. If that happened quickly the price would truly be extended from the trend line.

With the history of price being a lot further from the trendline, and support from the bullish momentum indicators shows (RSI and MACD), it is ripe for at least a quick trade. Add in the very large open interest at the 80 Strike Call for September Expiry next week and you have a trade opportunity.

There are two ways to look at this. For a quick trade you could buy the September 77.5/80 Call Spreads (offered at about 90 cents as I write) and look for a slow rise to 80 for a pin there next week. This will pay $2.50 if it closes at 80 or above next week. The second, for a longer term position, would be to buy the stock and sell the September 80 Call, a Covered Call (just under $77 as I write), looking for that large open interest at 80 to stall the rise next week. I did a little of both.

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