FB Short Trade Set-Up

Although I think this area is just fine for longer term FB shorts or to consider as an area to phase in to a short position, for those who like the trades that come to us and are willing to wait for them and if need be pass some trades by when they don't come to us on our terms (the highest probability trades, but also the ones requiring the greatest discipline and patience), then this FB set up may be for you.

 FB's 2-day trend line appears to be strong and intact, but a closer look shows you that much like the IWM, FB has been in a lateral range for 3 months, while perhaps not breaking the trendline, it is surely a change in character that FB has not seen anywhere else in the trend.

 Here's an estimation of the range, but there's one area that stands out, the October gap down. This market for the past 4-5 years has been relentless in filling gaps, which is a shame because many gaps are excellent signals like break-away gaps or exhaustion gaps, but I suspect with the rise of High Frequency Trading, these gaps have been targeted for filling well beyond anything I've seen since first trading.

I suspect FB will try to fill this gap and that looks like a high probability, excellent entry with much lower risk in an asset that already looks to be in big trouble.

Another approach that could be taken is phasing in to FB with a partial short position here and adding the rest if it fills the gap, this is averaging, but not averaging down which is an attempt to get out of a losing trade by throwing good money after bad. In this scenario, you have to set up your risk management in advance to allow enough room for the add-to position at the gap fill and make sure your position size is reflected in the risk management. In other words, I don't allow any one position to be larger than 15% of total portfolio so phasing in to FB, I might open with 5% of portfolio and add the additional 10% which will be at a higher level when FB reaches the area- averaging down would see you already in a full size losing trade and adding more to it, making a larger position than risk management rules allow for and in this scenario, you never enter even the first share without the risk management plan in place first, unlike the emotional averaging down in which you throw good money after bad in an attempt to get out of a losing position.

 FB's long term 60 min chart is severely negative and at the range area I mentioned.

However the 15 min chart is still in line off an earlier positive divegrence which seems to be an effort to hit the gap fill target.

Here's the accumulation in what was a flat trading range and a stop run/head fake move just before FB trended higher, however while the 15 min chart may still be in line, there's clear distribution migrating toward that 15 min such as this 5 min and all of the timeframes below.

FB 1 min

FB 2 min

FB 3 min.

I'd set some price alerts at the gap if you are interested, somewhere in the area of $79.50, by them the 15 min chart should be sufficiently negative as well, but I'll keep updating FB.

Again, looking at the bigger picture, I'd consider FB a fine short position right here at $78, but for a better entry, I'd look to the gap.