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How Facebook Became One Of The Great Stocks Of 2013

At the end of the year, it's important to take a look at your past mistakes. It's also helpful to go over the market's best performers. Doing both can help you do better in the coming year.

One of the winners of 2013 that's worth studying is Facebook (FB). Despite being the most highly anticipated new issue of 2012, Facebook quickly fizzled after its debut. But the stock redeemed itself this year.

Like the general market, Facebook started off 2013 with a bang, surging 19% in the first two weeks. Then it got rocky, as the stock slumped 30% from its late January peak.

Still, the correction let Facebook carve out a double-bottom base with a 29.17 (1).

The buy point from the double-bottom pattern is 10 cents above the high in the middle of the pattern. Sometimes this can be tough to spot.

On July 25, Facebook staged a breakaway gap past the buy point. It opened nearly 27% above the close of the prior session in reaction to solid second-quarter earnings announced the night before.

Breakaway gaps give the impression that once they happen, it's too late to buy. Yet they are signs of powerful demand, and investors should not shy away from them.

Former leaders such as Intuitive Surgical (ISRG), Green Mountain Coffee Roasters (GMCR) and Qualcomm (QCOM) all had breakaway gaps in the course of their stellar runs.

In most cases, investors should not buy once a stock moves 5% past a buy point in a base. On breakaway gaps, it's OK to do so. But you still must cut losses short at 7% or 8% if the stock falters.

By late October this year, the stock had run to 54.83 before settling into what would become a cup-without-handle base. Before that, the stock cleared an alternative entry at 39.42 in the week ended Aug. 23 in heavy trading. From there, it jumped 39% by October.

Just before it staged the breakaway gap, Facebook had mixed IBD ratings.

It had a Composite Rating of 78, which is not great. Its Rating of 86 was good. But its Relative Price Strength Rating of 29 was weak.

The Q2 report changed the outlook for Facebook, because a 75% surge in mobile ad sales showed a promising line of business.

Also, there's no denying that Facebook had a breakthrough product that changed the way people communicate and keep in touch with friends and family.

And Facebook gave other companies another avenue to promote their products and services.

Facebook had mixed fundamentals. Profit was flat to up 13% in the four quarters before the July . But sales grew 32% to 40% over the same period.