Large-capitalization technology stocks such as Facebook Inc (NASDAQ:FB) on Wednesday led the stock market higher. While through a multimonth lens I see many of these stocks as overbought and in need of consolidation, in the near-term another leg higher could be in the cards.
As a reminder and despite Wednesday’s broad-market rally, the stock market remains in a choppy state which still favors a “less is more approach” but doesn’t mean one cannot take advantage of high probability trades.
Click to Enlarge Given that FB stock with nearly 6% is the fourth-largest holding of the Nasdaq 100 as represented by the popular PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ), it would be ignorant on my part not to first and foremost look at the chart of the QQQ ETF to gain some perspective.
Here we note that the Nasdaq 100 for the past month has been in consolidation mode, but earlier this week it put in a notable bullish reversal off the lower end of the well-defined up-trend marked by the two blue parallels. With Wednesday’s advance, the QQQ ETF has scored a marginal breakout of the consolidation phase (bull flag), which could lead to another run higher toward the low to mid $150s.
FB Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
FB stock for its part on the longer-term chart is significantly overbought through a multimonth/quarter lens in my eye. Note how the stock trades above its longer-standing up-trend.
Although the stock looks overbought in this time frame, reasonable traders and investors must also respect the potential of what’s called a “range expansion move.” A range expansion move takes place when a stock turns an already steep and well-defined up-trend into an even steeper but lasting slope higher.
While lasting range expansion moves don’t happen very often, when they do they set up very-high-probability trades from a trend following perspective.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart we see that FB stock now looks eerily similar to what we saw on the chart of the QQQ ETF above, namely a bull flag pattern (black parallels). Wednesday’s rally in large cap tech stocks and thus the QQQ ETF also led to a marginal breakout of a bull flag for FB stock.
While traders must respect any notable bearish reversal as a stop loss signal, barring such a move FB stock now looks poised to lift higher toward $180 as a next major and round upside target.
Check out Anthony Mirhaydari’s Daily Market Outlook for Aug. 31.
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