U.S. stocks on Tuesday gave the bulls another strong rally, led by small-capitalization stocks as well as large-cap technology stocks in the Nasdaq 100 as represented by the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ). Within the latter segment lies Facebook Inc (NASDAQ:FB), whose 1.75% rally on Tuesday led to a breakout from a multiweek consolidation period and could now lead to another leg higher.
For some perspective, it is notable that FB stock and the very-large-cap technology stocks in the QQQ ETF have been and continue to be strong trend following stocks, which is to say that buying any dips or breakouts is a good strategy.
FB Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
But the picture is not the same in all time frames for FB stock. If we zoom out to a multiyear chart we see that this past summer, Facebook stock embarked on a breakout of its well-defined longer-standing up-trend.
This has resulted in dramatic overbought readings on the weekly MACD momentum oscillator (bottom of chart). Overbought readings like these can last for a considerable amount of time, which is to say that “shorting” a strongly trending stock like FB at this juncture is a low reward to risk strategy.
At the same time the odds are high that ultimately we see the stock mean-revert back toward or into the longer-standing up-trending channel as marked by the black parallels.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see that from late July to early October, FB stock consolidated nicely, which then led to a breakout and a next leg higher right up to the Nov. 1 earnings report. While Tuesday’s rally hasn’t fully cleared FB stock back above its post-earnings highs from early this month, the move showed plenty of giddiness particularly if one takes into consideration the equally bullish move in the Nasdaq 100 as a whole.
Active traders and investors could now look to play FB stock higher toward the high $180s, although I do not see this upside target getting reached in a straight shot. Any strong one-day bearish reversal could serve as a stop loss for this trade.
More importantly, however, is to keep in mind and respect the still strong long and intermediate term bull trends in the stock.
Check out Anthony Mirhaydari’s Daily Market Outlook for Nov. 22.
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