META fell 9% despite the earnings beat due to a one-time tax charge of $15.93 billion mentioned in the Oct. 29 earnings call. This happened even after beating revenue and EPS estimates. Since then, META has fallen an astonishing 20% and is finally showing signs of finding a bottom. Moments like this, where a great company with solid earnings loses a significant amount of market capitalization due to an extreme sudden reaction, creates amazing trading opportunities. This is the basis for traders like me who bet on mean reversion setups. When analyzing such a setup, we utilize a specific technical toolkit to filter out the emotional noise. For META, we look at three key metrics: Directional Movement Index (DMI) This indicator consists of three components: DI+ (green line), DI– (red line) and ADX (blue line) and measures the strength of a trend. A trend reversal typically occurs when two lines begin to change direction. That’s exactly what we’re starting to see on the META chart. MACD (5,13,5) Moving Average Convergence Divergence (MACD) is the basis of trend following analysis. Standard settings are effective, but can be slow in fast-moving markets. Utilize faster MACD settings (5, 13, 5) to increase signal responsiveness. Currently, Meta’s MACD line is rapidly closing the gap with the signal line. Although no bullish crossover has occurred yet, if the stock finds its footing here, a definitive crossover, a widely appreciated buy signal, could materialize within the next few trading sessions. RSI (Relative Strength Index) The Relative Strength Index (RSI) provides a third confirmation by measuring the speed and change of price movements. Following the earnings report, the RSI on Meta’s chart has fallen decisively into “oversold” territory below the 30 mark. The indicator is currently moving above this important threshold, a move that has historically been seen as a sign of seller exhaustion and an early green light for buyers to re-enter the market. If you’re interested in an emotionless trading system built on these principles, check out here where my CNBC readers can get a special starting offer. Trade Setup: META 630-635 Bull Call Spread This trade on META uses a bull call spread. This is a simple options strategy that reduces risk while providing guaranteed upside. One of the reasons I like this setup is how efficient it is. You can get exposure for around $250 per spread and easily scale in by adding contracts as your trades develop. To back up the numbers, if META closes above $635 by expiration, with 10 contracts you’ll be risking about $2,500 for a $2,500 profit. That’s just a few dollars more expensive than the current stock price. The idea is to structure the spread in close proximity to where the stock is being traded. If META retreats further and falls below $630, consider adjusting the strike downwards (for example, setting a $625/$630 spread) to take advantage of better entries with potentially higher rewards. Here is my exact trade setup Buy a $630 call, expiring December 12th Sell a $635 call, expiring December 12th Number of contracts: 10 Cost: $2,500 Potential profit: $2,500 -Nishant Pant Founder: https://tradewithmaya.com/ Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader Disclosure: Nishant has META There’s a Bull Call Spread All opinions expressed by CNBC Pro contributors are solely their own and do not reflect the opinions of CNBC, NBC UNIVERSAL, its parent or affiliate companies, and may have been previously disseminated on television, radio, the Internet, or another medium. The above is subject to our Terms of Use and Privacy Policy. This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any securities or other financial assets. The Content is general in nature and does not reflect any individual’s unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of your own financial or investment advisor. Click here for full disclaimer.
