Shares of Facebook Inc (NASDAQ:FB) have rallied nearly 35% since the late-August lows where the broader stock market flushed lower. While I remain positive on FB stock through the longer-term lens, the rally in recent weeks was too steep to sustain at this rate and looks subject to a mean-reversion move lower.
Active investors should refrain from chasing the stock higher here and should look out for the next bearish reversal day to play Facebook stock from the short side for a trade.
When I last discussed FB stock on Aug. 19, shares were trading in a so-called bullish flag formation that had the potential to break to the upside. However, the trade never triggered as a daily close above $95.80 — which I highlighted as an entry signal — did not occur. Facebook stock then quickly accelerated lower along with the broader market and has seen a wild V-shaped reversal since.
FB Stock Charts
Before looking more at the closer-up chart, let’s gain a little perspective from the multiyear view.
From this angle, we see that FB stock since its initial public offering in May 2012 has essentially traded in large rising wedge formation. Considering that FB is one of the somewhat few believable single-stock growth stories out there that the investment public is aware of, such a long-term rising wedge pattern ultimately stands a good chance of resolving higher and through a 12-month lens could see the stock in the $110-$120 area. Before this can take place, however, FB stock needs to put in some better consolidation time.
Moving on to the daily chart we see that FB stock on August 24th briefly dipped below its red 200 day simple moving average, something it had not done meaningfully so since the summer of 2013. On a daily closing basis however FB held this moving average and then proceeded to rally sharply. While the stock in the meantime also took out its yellow 50 day moving average as well as diagonal resistance (red dotted line) from the summer highs. the entire price action since late-August is simply too steep to sustain at this rate. Technical analysts will also point out that the price action in recent weeks has taken the shape of a near-term rising wedge pattern, which in this context has bearish implications and should at the very least lead to a mean-reversion move back lower to work off the overbought conditions.
As such, active investors in the near-term are likely best to avoid chasing the stock higher and in fact could look to play the stock to the short side upon the next bearish reversal candle and/or daily close below the $93.20 area for a move that could see the stock drip back into the mid $80s.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.
