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Trade of the Day: Facebook Inc Draws a Technical Line in the Sand

FB stock remains a trend following story - but there is some risk

By Serge Berger, InvestorPlace Contributor

Shares of Facebook Inc (NASDAQ:FB), despite the recent stock market volatility, have held their own relatively well. FB stock over the past few years has served investors with great returns and, though the technical lens, has been a great trend following story. There are some signs however that the steep 2017 rally may soon break its orderly flow.

FB Stock: Facebook Inc Draws a Technical Line in the Sand
Source: Shutterstock

Trend followers live and breathe by riding strongly trending assets higher or lower. A simple yet effective bullish trend following strategy strategy is to take partial profits at the upper end of trading ranges and re-buying at the lower end. Where it gets trickier is when market volatility increases and support lines begin to break.

As I often point out in this column, trading and investing is more art than science and a repeatable process is an absolute requirement for success.

FB Stock Charts

Click to Enlarge

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

Looking at the multiyear weekly chart of FB stock, we see that what was an orderly up-trend for several years turned into a steeper rally in July 2017 as the stock broke above the upper end of the channel marked by the black parallels. Note however that from a momentum perspective as represented by the MACD oscillator at the bottom of the chart, a so-called negative divergence has been taking place since this breakout. In other words, while FB stock broke out above the longer-standing trend lines, momentum began to slow, which often times can lead to a better mean-reversion or corrective move lower in a stock.

In the case of FB stock, if and when a corrective move were to set in then a first downside target would be the yellow 50 week simple moving average.


Click to Enlarge

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

On the daily chart, we see that the steeper 12-month and 2017 bull trend remains well intact. This trend at the lower end has the blue 100-day simple moving average as support, which was once again tested earlier this week.

If and when FB stock were to break and hold below the $177 area then active investors and traders could play the stock for a  mean-reversion move lower into the mid $160s as a first downside target. Alternatively, any strong bullish reversal above or near the high $170s could be a next buy signal to add to FB stock for a move back higher to the upper end of trend.

Check out Anthony Mirhaydari’s Daily Market Outlook for Feb. 8.

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