U.S. large-cap technology stocks as represented by the PowerShares QQQ Trust (ETF) (NASDAQ:QQQ) rallied about 4.50% over the past two weeks along with a broader stock market lift. This has brought stocks like Facebook Inc (NASDAQ:FB) to the upper end of their trading range. While through the lens of fundamental analysis FB stock in my eye has plenty going for itself, the charts for the near-term are singing a different tune.
When looking at stock charts it is easy to get all excited about different technical formations, which in their own right can certainly be useful. However, too often traders and investors forget that psychological aspect of what charts are telling us. For shares of Facebook, this psychological aspect now could be coming to a head.
On the multi-year chart, FB stock has been a trend follower’s dream in recent years. The well-defined lower end of the up-trending channel offered one buying opportunity after another. The most recent of those buying opportunities came in late March after the stock fell more than 20% from its highs and became oversold. I discussed this buying opportunity on March 21st in this article here.
While the longer standing up-trends in FB stock continue to hold like a charm, the stock’s overshooting of the up-trending channel in July 2017 arguably has changed the underlying tone of how the stock will trade for the time being.
The principle of ‘mean-reversion’ is a powerful one in the stock market. One way to see this is when any given stock rallies or falls too much in the near to intermediate term it will tend to mean-revert toward the other direction for a time.
To wit, the February – March drop in FB stock was exactly such a mean-reversion move. The strong bounce in FB stock over the past few weeks has now pushed it once again above the aforementioned channel.
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the daily chart, we see that coming into January 2018 some investors accelerated the chasing higher of the stock. Those buyers likely have entry points in the mid to high $180s and because of the selloff in February and March are just now beginning to see their p&l come back to breakeven.
Through the lens of trader psychology, I am now making the argument that those buyers will soon be selling their shares as the shock of the drop in FB stock likely stung deep enough for them to be happy with a no-profit trade. If this happens then the stock should find plenty of resistance for the time being in the $185 – $195 area.
Active investors and traders could look to play FB stock lower into the mid $170s as a next downside target.
The market environment in recent months has changed notably and trading and active investing opportunities have increased.
One of my favorite ‘trading’ setups that is working particularly well in this market environment takes place in the first hour of the trading day. On Tuesday May 15, I am holding a special webinar for Investorplace readers to present the details of this cash-flow/income trading setup. Register here.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
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