Facebook (NASDAQ:FB) is set to report third quarter earnings after the closing bell on Oct. 30. While most Facebook stock investors will be focused on the earnings report and daily active user numbers, there is a development in the weekly chart that caught my attention.
The pattern that is developing is a possible head and shoulders pattern. The pattern is a bearish one in the end, but where Facebook stock is in the pattern would mean a rally in the coming months.
A head and shoulders pattern starts with a temporary high that forms the left shoulder. The stock then dips to form the left side of the neckline. The stock bounces back and moves above the left shoulder to form the “head” of the pattern. A second dip to a similar level as the left side of the neckline forms the right side of the neck. That is where the chart on FB stock is at this point.
For the head and shoulders to continue forming, FB stock will need to rally up to the $190 area in order to form the right shoulder of the pattern. If it is indeed a head and shoulders pattern, the stock will turn lower after the right shoulder is formed and the stock will drop below the neckline. In this case, the neckline is at the $150 level.
As you can see, Facebook stock is in oversold territory currently. The 10-week RSI and the weekly stochastic readings are at the lowest levels they have been at in the last five years. In fact, they are at their lowest levels since the stock debuted in 2012.
For Facebook to be in oversold territory as it prepares to announce earnings has been a rare occurrence in the last three years. The only time it has happened in the last five years was in April, and that is when FB stock rallied from $150 to $210 to form the head of the pattern.
Facebook stock has fallen 28.5% since its last earnings report, but the sentiment indicators haven’t changed very much. The short interest ratio is just over 1.0 and that is actually down from where it was in July.
There are 44 analysts following stock in Facebook and 41 of them rank the stock as a “buy”. In July, 42 out of 46 analysts rated the stock as a “buy”, so that overwhelming optimism hasn’t changed. As for the put/call ratio, it is currently at 0.787 and it was at 0.82 in July when the company reported earnings.
Even though the indicators are reflecting just as much optimism as they were in July, I get the feeling that the actual expectations for third-quarter earnings are a little more tempered. The drop in Facebook stock would certainly be one reason to temper expectations.
Bottom Line on Facebook Stock
Analysts expect FB to earn $1.47 per share on revenue of $13.79 billion. The consensus estimate is down a penny from where it was 30 days ago. Of course, like I mentioned before, the daily active user numbers will be viewed just as closely as the earnings-per-share estimate and its revenue. In July, the company beat both the EPS number and the revenue number, but dropped due to the daily active user numbers stalling.
If FB beats on the top- and bottom-lines again, and the daily user numbers are in line with estimates, I see Facebook stock bouncing back up to the $190 level. The oversold levels on the oscillators are too hard to ignore, especially on a company with the earnings and sales growth of Facebook.
If FB stock does rally back up to $190, investors will have to pay attention to whether FB stock price stalls there. If it does and then starts turning lower, it could be the head and shoulders pattern playing out.
As of this writing, Rick Pendergraft did not hold a position in any of the aforementioned securities.