Why the Facebook rally could end at the IPO price

Simon Dawson | Bloomberg | Getty Images

Facebook shares have enjoyed an unbelievable run over the past week, as earnings that showed massive mobile growth, as well as excitement about mobile games, have brought the stock all the way back to the $38 price at which the company initially offered shares.

But that $38 level might also mark the end of the stock's recent bull run.

(Read more: Facebook nearing its IPO price. Here's why)

"Facebook, at current levels, is a stock that has recovered to a very difficult level where considerable overhead supply comes into play," Oppenheimer Chief Market Technician Carter Worth wrote to CNBC.com. "580 million shares of Facebook traded between $45 and $38 on the day of its IPO, so there are, by definition, a lot of 'dead bodies' above," or in other words, "hundreds of millions of 'pissed off' shares between $38 and $45 that are likely come onto the market as the stock probes into the high $30's and low $40's."

After all, Worth added: "The desire to 'break even' or to 'get my money back' is a very powerful phenomenon." For that reason, Worth advises selling Facebook shares.

(Read more: Facebook a 'small buy': Mark Mahaney)

Dan Nathan of RiskReversal.com is of the same mind. "I think the $38 level will be important from a psychological standpoint for retail investors," he said.

"Retail at first didn't expect to get a lot on the IPO, and then they got filled on way more shares than they really wanted. So if they haven't sold already, and stuck with it for more than a year, you will very likely be happy to take the recent gains and move on," said Nathan, a CNBC contributor.

The stock certainly appeared to contend with the $38 level in Tuesday trading. After rallying all day, shares hit $37.96 shortly before the close, only to retreat. That said, the stock has surpassed that level in Wednesday pre-market trading.

But even some who think Facebook shares are worth more than $38 don't think they're worth too much more. In what has to be one of the Street's odder price targets, Stifel Nicolaus analyst Jordan Rohan recently reiterated his "Buy" rating on the stock and slapped on a target of $38.01.

How is Rohan able to calculate the value of Facebook shares to the penny? "The target was intended to remind investors that I expected FB shares to trade above the $38 IPO price," Rohan wrote to CNBC.com.

Of course, if that's how high above $38 a bull sees the stock going, perhaps investors would do well to sell at that IPO price after all.

—By CNBC's Alex Rosenberg. Follow him on Twitter: @CNBCAlex.

Follow the show on Twitter: @CNBCOptions.

Latest Video

  • Options Action: Dropbox set to pop?

    Optimize Advisors' Mike Khouw looks into Dropbox options even as the company is in the midst of a rough patch. Options traders are betting on a rebound. With CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Steve Grasso and Jon Najarian.

  • Options Action: GPS earnings on tap

    Optimize Advisors' Mike Khouw looks at options traders betting against Gap stores ahead of the retailer's earnings. With CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Dan Nathan and Brian Kelly.

  • The straight and narrow trade

    The Chartmaster with a trade on IYT. Why With CNBC's Courtney Reagan and the Options Action traders, Carter Worth, Mike Khouw and Guy Adami.

Tutorials

Host Bio

  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

From Our Sponsor