Social media website Facebook (FB) staged a beauty of a breakout last Friday, popping more than 5% to push the stock not only to a fresh 52-week high, but a brand-new all-time closing high at $40.55. Today the strength continued, with Facebook stock nearing its first-day open around $42.
When I last discussed Facebook on July 31, the stock had just reported its latest earnings a few days prior and still was in the earnings-surprise honeymoon phase. As I voiced at the time:
“Such powerful moves often have a few more days of upside momentum before they need to take a near-term breather, and that’s what I see in store for Facebook stock. The post-earnings rally now amounts to a 40%-plus move, and from where I stand, that’s not something I want to chase.”
Sure enough, soon after I wrote the above words, Facebook stock settled into a three-week consolidation phase that, from a technical point of view, took the shape of a bull flag formation.
Before getting into that, though, let’s revisit the longer-standing chart of FB below:
The major reference point over the past few weeks remains the significant post-earnings up-gap, which likely caught the bears by surprise, forcing them to cover short positions as bulls plowed onto the scene in full force. A major trend change had occurred.
The aforementioned consolidation form in the shape of a bull flag formation that built during the past few weeks all took place around Facebook’s initial public offering price of $38. After last Friday’s significant rally, which resolved the bull flag to the upside, investors who bought the stock at the IPO price or lower are now comfortably in the profit zone.
Through a psychological lens, I therefore now see two things:
- While some Facebook stock investors who are sitting on a profitable position for the first time in a long time likely will take profits, I think the majority of the longer-term holders will see their initial belief in FB justified, leading them to actually remain in their positions or add to them.
- As this most recent breakout in Facebook has come in the face of a weakening broader stock market, it is very possible that momentum and trend-follower investors will enter Facebook stock, which could result in much more steady of a rise in its share price.
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free Weekly Market Outlook Video here. As of this writing, he did not hold a position in any of the aforementioned securities.