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Facing Facebook And Zynga

12/03/12 08:40:40 AM
by Koos van der Merwe

Facebook and Zynga shares have fallen heavily since their debit. We all know that. But is it time to own the stock?

Security:   FB, ZNGA
Position:   Accumulate

Facebook shares have slowly been recovering since its dramatic collapse after its listing on the share market. Over the past few weeks, it has slowly been recovering. On Friday, November 30, Facebook announced that it was redrawing its contract with Zynga. Why? Does Facebook intend to start producing its own games, or for that matter, was it Zynga that instituted the change, not being happy tied to Facebook and looking for markets other than Facebook? The real truth will never be out, but the market is siding with Facebook, because the share price at time of writing is flat, whereas the share price of Zynga has fallen 6.87% from the previous day. So which one do you buy, or do you buy both?

Graphic provided by: AdvancedGET.
Figure 1 is a daily chart of Facebook with a JM internal band showing the buy and sell signals given. The internal band is a 15-period moving average offset by 2% positive and 2% negative. Note how the price has risen strongly to fill the gap, in fact exceeding the upper level of the gap. Note also that the relative strength index (RSI) is currently at overbought levels. This is suggesting that a sell signal could occur in the near future. We should therefore keep stops close.

Graphic provided by: AdvancedGET.
Figure 2 is a daily chart of Zynga. The chart shows the JM internal band plus buy and sell signals given. The chart also shows the gap as the share price fell when Facebook price fell. Zynga is trading far below its opening price. The share price has given a JM internal buy signal and has tried to fill the gap, but so far has failed. The price does look as though it could still continue rising to fill the gap. Unlike Facebook, the RSI is rising and has not given a sell signal.

The link between Zynga and Facebook appears to have been broken. With the new contract drawn with Facebook, Zynga shares appear to be on their own. Facebook, on the other hand, is now free to develop their own games. Both shares are a buy at present levels, with Zynga possibly a better buy than Facebook.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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