by Serge Berger | June 11, 2014 7:48 am
Shares of social media giant Facebook (FB) improved nearly 5% on Tuesday on the back of news that a PayPal head will join the company to lead its messaging products division. The rally in Facebook stock — which also carried other social media stocks such as Twitter (TWTR) and LinkedIn (LNKD) — was technically sound and very well could lead to a further climb in coming weeks.
After the close of Monday’s trading, news broke that David Marcus, president of eBay’s (EBAY) PayPal, would be stepping down and joining Facebook as Vice President of Messaging Products. To some investors, the move signaled that Facebook is looking to further focus on and build out its mobile platform.
While that’s good to know, I can’t help but find that a somewhat redundant finding as this has been a focus for the company (as well as the analyst community) for some time, and in the last quarter Facebook showed great growth in mobile advertising.
Still, it’s important not to try to rationalize every bit of news; sometimes, price action just is what it is. Price is the only arbiter, and if price action sets a clear tone — such as it did in Facebook stock on Tuesday — then the active investor is on average better off going with the flow.
Facebook stock continues to hold up very well from a bigger-picture standpoint. After the initial honeymoon phase in 2012 and part of 2013 where investors had to get their heads around the company’s business model and prospects for growth, FB stock staged a magnificent breakout in July 2013, which sparked a massive rally.
However, this rally in Facebook stock eventually got too steep — as it did for social media stocks as a whole — and by March, the stock began a sharp mean-reversion move of more than 20%. I call it a mean-reversion move because the stock (in hindsight) found support at the July 2013 uptrend line.
On the daily chart below, note how Facebook stock exhausted the aforementioned mean-reversion move by April and slowly began to form a bottom, just as investor sentiment in social media stocks also hit lows.
In recent weeks, though, a number of high-profile investors disclosed recently having bought shares in FB — in other words, they bought into fear, and more often than not, that’s a winning strategy.
During the past couple of weeks, Facebook stock has consolidated in a tight fashion right near $63.50, which is a multimonth resistance area. With Tuesday’s strong rally, FB shares cleanly broke past this resistance area, and this now opens the stock up toward the $68-$70 area in coming weeks.
As always, for risk management purposes — which is what this business is all about — a sudden reversal of Tuesday’s rally could negate the breakout.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
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