Social media giant Facebook Inc (NASDAQ:FB) is scheduled to report earnings after Wednesday’s bell. Although FB stock hasn’t seen much directional price action in recent weeks, it does remain one of the few growth stocks that is showing a very well-defined uptrend on the charts.
From where I sit, this Wednesday’s earnings report could either accelerate the uptrend or kick off a more meaningful pause in Facebook’s rally.
Before looking at the Facebook stock charts, allow me to reiterate one point regarding earnings season. It’s something I have highlighted before, but it’s of great importance, so it bears repeating again:
Novice traders often feel the allure of opening trades ahead of major company earnings reports (such as in FB stock) in the hopes that a certain bullish or bearish outcome will lead to great and quick profits. Traders do stand a chance of correctly guessing what an underlying stock will do on any given earnings report, but those odds are about 50%.
In other words, statistically speaking, trading ahead of earnings reports hoping for a profitable P&L curve is akin to gambling. Much better odds tend to set up after the earnings report, once the stock has time to react to the news.
FB Stock Charts
Looking at the multiyear weekly chart of Facebook stock, we see price action that very much represents the fantastic growth in this company’s fundamentals. There are no ifs and buts about it. The growth story in FB is real, and in my opinion, it’s staying around.
The price action over the past few years has largely taken place in a well-defined uptrend (red dotted parallels). The lower end of this trend is also supported by the yellow 50-week simple moving average, which roughly equates to the 200-day moving average.
However, equally strong as support has been resistance. Each time FB stock rallied too strongly, it found resistance at the upper end of the trend.
Facebook bulls are now betting that this stock will soon break out of this already steep slope to the upside. Historically speaking, the odds do not favor a sustainable breakout of a steep up-slope like the one we see here.
The options market currently is pricing in a roughly 5.5% move in either direction for FB stock following Wednesday’a announcement. Using Monday’s closing price around $131 per share, this translates into a move up to $137 or down to about $124.
Should Facebook stock rally toward $137, it also would reach the very upper end of its multiyear uptrend line. If so, that would make it a better sell than a buy, to me.
If FB stock falls toward the $124 area following earnings, it would reach its blue 100-day SMA, which would be a better buying spot upon a confirmed bullish reversal. Even better support than the 100-day SMA would be a move down to the red 200-day SMA, which has been a source of tremendous support for years.
In summary, FB stock is a buy on dips, but a sell on rips.
As one of my old mentors at JPMorgan used to remind me each morning on the trading floor: “Remember to buy low and sell high. That’s your only task.”
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