Facebook Stock Is Still a Good Buy on Any Dip … For Now

Wall Street tends to overreact to headlines

The 12-month scoreboard would show that Facebook (NASDAQ:FB) stock is lagging since it’s down 8%, while the markets, in general, are up 3% for the same period. But lately, FB stock has had an incredible rally off its December lows.

Facebook Stock Is Still a Good Buy on Any Dip ... For Now
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Even though I saw the breakout in FB early enough to trade it, I chose to use the Nasdaq Invesco QQQ Trust (NASDAQ:QQQ) as the vehicle to capture the rally. Why? For the simple reason of it now being a company prone to surprise headlines and I am not referring to the global outage they had this week.

Case in point, while investors on Wall Street were exuberant about Facebook stock this week, it got hit with nasty headlines about legal troubles ahead. These likely stem from the data privacy debacle from the Cambridge Analytica that just won’t quit.

Now the company may face criminal investigations from the Justice Department on how Facebook shared user data with business partners. This is different from merely having a few public outcries over privacy expectations. It is serious stuff to have criminal indictment looming over your stock.

To make matters worse, we learned that the head of Chief Product Officer and the head of WhatsApp are leaving the company. This comes on the heels of major announcements from FB CEO Mark Zukerberg. Needless to say, the company’s future seems in limbo.

However, I still believe it is a money-making engine that will be hard to break. I wrote a note years ago saying that it would take colossal mistakes to ruin the potential of a billion users. Well, they are sure trying and testing my theory on that.

I was lucky to trade FB stock from the long side into earnings based on conversations I’ve had with advertisers. They absolutely love the way it works for their businesses and they didn’t care at all about the privacy issues. So I view those as a distraction away from the engine that actually generates the revenues: The advertisers.

It is not easy to replicate the reach that Facebook has, so until there is an alternative. It would take a serious change in how ads flow through its model to kill the top line. So if you’re in Facebook stock for the long term, then I stay in it. Nothing so far has changed the thesis on that front.

From a shorter-term trading perspective, there are levels to know.

Bottom Line on FB Stock

Last year was tough for all stocks and the crash ended on Christmas. Since then, FB stock set on a 40% rally off the double bottom test, but it is now looking like a double top is forming at $173 per share. This is not surprising because this is a level that has been in contention since July 2017.

Contention levels like these create congestion and on the way up these are temporary resistance. As long as the fundamentals remain the same, eventually the bulls will prevail and take them out. That’s how breakouts develop. They bang against resistance until they pierce it and overshoot higher.

The best way to evaluate a stock is to cover up the name and examine the price action. The FB weekly volume profile also tells me that the zone around $173 is the point of interest, so both bulls and bears want to rule it.

The problem for short-term FB traders is that the fast rally left weak levels for the stock. If it loses $166 per share it could target $159. The problem is that this is another potential trigger line that could itself send the stock lower to cover the open gap at $151 per share.

This is not my forecast but it is a set of two scenarios that could unfold into next week. If this happens I bet that it would be a trading opportunity from the long side. I am not one to short the stock, but I will go long it on dips where I have clear levels.

The Facebook thesis is still intact for as long as advertisers are happy. I will change my mind as the facts change, but for now, the bulls have the advantage.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.

Article printed from InvestorPlace Media, https://investorplace.com/2019/03/facebook-stock-good-buy-on-any-dip/.

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