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Facebook, Inc. (FB) stock set its all-time intraday high of $224.20 on Jan. 29 and then traded as low as $137.10 on March 18. This puts the stock deep into bear market territory at 33.2% below the high.
In the process, Facebook shares cascaded below their annual and quarterly value levels at $185.93 and $178.64, respectively. Perhaps the closes at the end of March will give us a monthly value level for April or for the second quarter of 2020.
Facebook beat earnings per share (EPS) estimates in the past two quarters but missed in the two quarters prior to that. However, earnings may not be quite as important when the world is worried above the spread of COVID-19.
The daily chart for Facebook
The daily chart for Facebook shows that the stock had been above a “golden cross” since April 3, when the 50-day simple moving average (SMA) rose above the 200-day SMA to indicate that higher prices lay ahead. The stock slipped to a test of its 200-day SMA at $161.33 on June 3, 2019, as a buying opportunity. The 200-day SMA was tested again at $175.30 on Oct. 2 as another buying opportunity.
This buy signal ended when the stock closed below its 200-day SMA, which is the green line on the chart. With the stock below its annual pivot at $185.93, a “death cross” will form next week. This will happen when the 50-day SMA falls below the 200-day SMA to indicate that lower prices will follow.
The weekly chart for Facebook
The weekly chart for Facebook is negative, with the stock below its five-week modified moving average of $186.17. The stock closed last week below its 200-week SMA, or “reversion to the mean,” at $163.95. This average was tested and held as the stock bottomed at the end of 2018.
In the longer term, the high from the fourth quarter of 2018 and the 2020 high could be considered a double top. Facebook stock thus had a bear market decline in the fourth quarter of 2018, a bull market gain in 2019, and now a bear market decline in 2020.
The 12 x 3 x 3 weekly slow stochastic reading declined to 32.24 last week but was above 90.00 when the stock traded to its all-time high. This put the stock in an “inflating parabolic bubble” formation, and bubbles always pop.
Trading strategy: Buy Facebook shares on weakness to the 2018 low of $125 and reduce holdings on strength to the annual pivot at $185.93.
How to use my value levels and risky levels: Stock closing prices on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual, and annual levels remain on the charts. Each calculation uses the last nine closes on these time horizons.
Monthly levels for March were established based upon the Feb. 28 closes. New weekly levels are calculated after the end of each week. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an “inflating parabolic bubble” formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered “too cheap to ignore,” which is typically followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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