“Facebook, Facebook, Facebook!” With all of the attention on the social nework’s upcoming IPO, it’s no surprise that other stocks are starting to get Jan Brady syndrome right now. But folks are focusing on the wrong firm. Here’s why. Investors looking to pick up shares of Facebook (FB) on the cheap and early are going to be sorely disappointed.
Hype is strong, and the IPO is already oversubscribed in the U.S., a status that effectively guarantees a valuation on the high end of the expected range — think a $100 billion market cap for the firm. But valuation is only part of the problem with buying FB when it goes public later this month.Trading history is another.
Some traders are clamoring to buy shares as a momentum move, hoping to buy FB on its first trading day and sell into the buying frenzy that will ensue. The problem is that Facebook doesn’t have a trading history yet, so shares have no momentum to speak of at this point. But there are some profitable technical trades taking shape in more established IPO names right now.
Today, we’ll look at how to take advantage of five of them before Facebook even opens for trading.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock’s price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Here’s a look at five recent IPO technical setups that could deliver breakout gains to your portfolio this week.
First up is LinkedIn (LNKD), a different sort of social network. While Facebook is notorious for getting people fired, LinkedIn’s professional network is focused on getting them hired again. So far this year, shares have rallied more than 76% — a massive rally that has major potential to move higher in May.
That’s because LinkedIn’s rally has been orderly. It’s been well-defined by a trend channel that’s acted as support and resistance for shares’ ascent. As LNKD pulls back to test trend line support below it, buyers are going to get another shot at a low-risk entry point for LNKD.
In the near-term, shares have made a Japanese candlestick formation called an “abandoned baby top.” The pattern makes a return to trend line support the likeliest move in the next few trading sessions.
It’s critical to wait for a bounce off of support before buying LNKD. Ultimately, support levels do fail, and you don’t want to be left holding the bag when the one in LNKD does. By waiting for the bounce, you have a chance to see that support’s still holding up below that trend line before you put your money on the line.
If you do decide to take this trade, I’d recommend putting a protective stop just below the 50-day moving average.
LinkedIn also shows up on a recent list of 15 Apple-Like Stocks That Could Bear Similar Fruit.
Zillow (Z) is another name that’s been on fire in 2012. Shares of the real estate Web site have rallied more than 82% since the first trading day in January. And, like with LinkedIn, there’s technical evidence that points to higher highs in May.
Zillow has been trending higher this year, bounded by a trend line support level (the dashed line) that’s still in force at this point. A series of horizontal resistance levels have served as breakout points for shares, giving Zillow a chance to consolidate sideways before moving onto the next leg of its rally.
Last week’s earnings were a major positive catalyst that caused shares to take out their most recent resistance level at $38. (The stocks was also featured in “5 Earnings Stocks Poised to Pop.” Now this stock is in breakout mode.
The move above $38 took out a glut of supply of shares that had previously been sitting at and above that price level. For traders, that’s an indication that the nearest upside barrier just got taken out. Shares threw back to test newfound support at $38 in yesterday’s session, but Zillow caught a bid at the open and rallied to close at new highs, a very bullish signal.
I’d recommend keeping a protective stop at $36 if you decide to buy here.
Things haven’t been quite so strong for shares of Pandora (P) in 2012: Since the calendar year ticked over, P has seen its shares drop close to 14%. But there are signs of a change in trend for this internet radio Web site. It all comes down to knowing where to be a buyer.
Right now, Pandora is forming an ascending triangle bottom, a bullish pattern that’s formed by a horizontal resistance level above shares and uptrending support below them. Essentially, as Pandora gets bounced in between those two technical price levels, squeezing closer and closer to a breakout above $9 resistance. When that breakout happens, we’ve got our buy signal.
Momentum, as measured by 14-day RSI, and volume are both providing confirmation of this pattern right now. RSI has been uptrending in the near-term, and volume has been declining as the pattern formed.
We’ll want to see a spike in both indicators when the breakout above $9 happens.
Zynga (ZNGA) is forming almost the exact opposite pattern right now. This online gaming stock is sporting horizontal support to the downside and downtrending resistance above shares, a combination that forms a descending triangle. The trading implications of this pattern are opposite as well. While Pandora’s setup has bullish implications, Zynga is a short-side trade on a breakdown below $8 support.
Volume and 14-day RSI are both confirming this setup as well. In the case of RSI, the indicator has been locked in a well-defined downtrend since back in February. The fact that the downtrend still hasn’t broken is telling. It indicates that selling pressures arestill increasing in ZNGA. Shorting Zynga isn’t cheap right now, but in the short-term, the premium could be well worth it on a crack below $8.
For ZNGA short sellers, I’d recommend putting in a protective stop just above $9.
We can’t talk momentum IPOs without bringing up Groupon (GRPN), a stock that’s had a pretty dramatic fall from grace in the last few months. Shares are down around 50% since the start of the year.
Groupon’s selling isn’t showing any signs of abating. In fact, the downtrend accelerated back at the start of April. Shares have found support a few times during the downtrend, but it hasn’t been particularly strong. Instead, those breaks of support have merely been good entry points for short sellers.
The most recent support level was put in yesterday at $10, solidified by a candlestick pattern called a piercing line. The bullishness is only a short-term signal, though. A break of $10 support is a solid short signal for Groupon.
Some traders may have noticed that RSI is looking oversold right now. While oversold generally makes people think that a correction is in store, the fact of the matter is that statistically, oversold stocks are more likely to become more oversold in the short-term than they are to reverse.
Whatever you do, don’t try to be contrarian and buying this falling knife in the longer-term.