Lesson : Facebook (FB)'s IPO base

A hot new initial offering may need time to cool off and set up a good buy point. It's the quality of the base formed, not how fast it forms after its market debut, that matters.

By the time Facebook (NASDAQ:FB) came public in May 2012, it had become one of the most anticipated initial public offerings. Leading up to its debut, the social network said it expected to price its IPO at $28 to $35 a share. Facebook actually priced at $38 by the time the debut came around, the second-biggest U.S. IPO of all time with a market value of $104 billion.

But the company's financial performance had raised eyebrows as its first-quarter 2012 revenue, operating income and profit margins fell from Q4 2011. The large amount of insider selling, too, sparked concerns.
On May 18, 2012, Facebook made a surprisingly weak showing. The stock popped 12% early and got as high as 45 before ending its first trading day with a 23-cent gain at 38.25.

The next two weeks, shares tumbled 17% and 13%, respectively, in heavy trade. The week ended June 8, 2012, they pared an 8% loss to 2%, a sign of support (1). It looked like Facebook might be setting up an IPO base as the stock rose the next two weeks. Instead, it headed south again and trended lower for the next 10 weeks before bottoming out and reversing higher in September. The stock fell to 17.55, 54% below its offering price. So much for buying a hot IPO on its debut.

Over the next three months, it built the right side of a choppy cup-with-handle pattern. This was its first IPO base. Facebook cleared the 28.98 handle buy point the week ended Jan. 11, 2013, and rose just 12%. It then carved a smoother, shallower base. This turned into a double bottom with a 29.17 buy point.

Facebook soared 31% the week ended July 26, blowing past the entry in its heaviest weekly trade ever (2). The firm reported very good Q2 results and succeeded in making smartphone-based ads a serious part of its revenue engine.

Facebook rallied 75% before forming a new base in October.

Lesson : Google's IPO base

Initial public offerings, or IPOs, can go on to make spectacular gains. But they can also be volatile.

Knowing that new issues are different animals that need to be handled differently can help you trade excellent IPO stocks, such as Google (NASDAQ:GOOGL), which came public nearly 10 years ago.

IPOs usually come to the market with much anticipation. Many have some kind of market- dominating product or service. Google was No. 1 in the Internet search market.

In order to fuel expansion, a company will sell a large stake of itself in exchange for money. This is good for the company and gives investors a chance to own a piece of the action.

Many individual investors can forget about buying shares at the offering price, unless they're well connected or have a big account.

The key to trading new issues is to follow rules and have patience. First, don't buy into the hype in the first few days of trading, which can see big swings in either direction. The first day can be particularly volatile.
Without much price action and moving averages to guide you, buying in the early stages can be risky. It's best to let the new issue settle and consolidate gains.

From there, wait for the stock to build an IPO base. Unlike other patterns, which are at least five or six weeks in length, IPO bases can be as short at nine or 10 days. Look for tight, constructive action. Volume should be light during pullbacks and heavy during the stock's upside.

Google came public on Aug. 19, 2004, to much fanfare. On its first day of trading, the stock hit a high just above 104, compared with its offering price of 85 (1). It rose for two more days. On its third day, Google hit a high of 113.48, but closed near its session low (2).

The stock consolidated gains for the next 15 sessions and corrected lightly in the process, down just 13%. Its correction was well in the norm of other bases. The consolidation formed an IPO base with a 113.58 buy point.

Google broke out Sept. 15. Volume should be at least 40% above average on a breakout, but with many new issues, there hasn't been enough trading activity to calculate a 50-day average figure. So there is a judgment call when it comes to what is heavy volume.

In Google's case, turnover that day was one of the heaviest in three weeks. The stock bolted 78% by early November before pulling back to its 50-day moving average 3.