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Facebook, Inc. (FB) stock has completed a 100% retracement into the July 2018 high near $220 and filled the July 26 sell gap posted that year in reaction to the Cambridge Analytica privacy scandal. This marks a major resistance level, raising the odds for a multi-week downturn that tests 200-day exponential moving average (EMA) support near $190. Given bullish accumulation in recent months, the decline could easily find support around that level, setting the stage for a major breakout.
The escalating coronavirus outbreak marks a wild card in this equation, but the social media giant is better positioned than most big tech stocks to withstand an epidemic because user engagement tends to increase during macro events. Even so, Facebook is unlikely to avoid technical damage if broad benchmarks continue to sell off because it’s a component in multiple exchange-traded funds that get targeted by algorithms during intermediate corrections.
Wednesday’s post-market earnings report may provide the next catalyst for a reversal. Wall Street analysts expected the company to report earnings per share (EPS) of $2.53, a 6% year-over-year increase, on $20.9 billion in Q4 2019 revenues. The stock hit a three-month high in October after the company beat Q3 2019 top- and bottom-line expectations and reported a 9% year-over-year increase in monthly active users (MAUs).
Meanwhile, government anti-trust and privacy investigations continue to target the company and its practices. A December report by The Wall Street Journal alleges that the Federal Trade Commission (FTC) may soon seek an injunction to stop a planned software integration between Facebook’s diverse product lines. In addition, the company is standing at ground zero in the 2020 presidential election, still refusing to fact-check targeted political ads.
FB Long-Term Chart (2012 – 2020)
The stock topped out in the mid-$40s following a poorly received 2012 initial public offering (IPO) and sold off to an all-time low at $17.55 a few months later. The subsequent uptick completed a round trip into the prior high in third quarter of 2013, setting off an immediate breakout that gathered strong buying interest. The rally eased into a rising channel at the start of 2014, signaling impressive institutional sponsorship.
Channeled action persisted into a September 2018 breakdown and decline to a two-year low in December. The stock has spent the past 13 months completing a round trip into the 2018 high at $218.62, finally reaching that inflection point on Jan. 10. It posted a short-term top four points higher on Jan. 16 and has spent the past six trading days pulling back below resistance. Despite the reversal, price action has finally remounted the channel after a nine-month testing period.
The monthly stochastics oscillator crossed into a long-term buy cycle from a deeply oversold level in January 2019. A modest June sell signal persisted into a bullish November crossover that illustrated impressive relative strength. And even though the indicator has reached the overbought zone once again, it hasn’t lifted into an extreme level that would raise the odds for another downturn.
FB Short-Term Chart (2017 – 2020)
A Fibonacci grid stretched across the uptick since December 2018 organizes seemly chaotic action, but keep in mind there’s no technical confirmation that the rally wave has ended. This view places the May low at the .618 retracement and the October low at the .50 retracement, targeting those levels if selling pressure picks up in the coming weeks. However, the 200-day EMA rising from $190 is equally important, with those downdrafts testing support successfully.
The on-balance volume (OBV) accumulation-distribution indicator posted an all-time high in July 2018 and entered an aggressive distribution phase that ended at a 16-month low in November 2018. Buying power into January 2020 has failed to reach the prior high, setting off a bearish divergence when the rally mounted the prior high. Even so, it won’t take many new shareholders at this point for OBV to hit a new high.
The Bottom Line
Facebook stock has reached resistance at the 2018 high and could reverse in a multi-week correction. Despite the potential downturn, technical elements still support an eventual breakout to new highs.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.
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