Facebook (FB): Inevitable Tumble Will Lead to Inevitable Rebound
On Monday of this week, Facebook Inc (NASDAQ:FB) shares suffered their worst single-day loss since November of last year. All told, FB stock lost 4.5% of its value after investors learned the company may have known about U.S. political advertisements being sponsored by Russia long before the company actually acknowledged it. Fearing the revelation may well lead to new and restrictive regulation of the ads and articles that appear on Facebook, investors responded as one might expect.
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The FB stock price today is up from Monday’s troubling close, suggesting traders aren’t quite as worried as they initially were. On the other hand, with the prospect of more oversight still looming, Facebook shares are still being viewed like a liability as much as they are an opportunity.
What if, however, Monday’s setback and the potential landslide it may have started have far less to do with its dinged credibility and far more to do with the fact that traders were just looking for a reason to take profits? The latter is more likely to be the case than many have assumed.
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Either way, good news: The most plausible technical floor for FB shares isn’t too far away.
Shoulda Seen it Comin’
Just in the interest of not reinventing the wheel, Serge Berger talked at length about the implosion of FB stock on Tuesday morning, pointing out how the selloff broke a long-standing uptrend and set the stage for a trade-worthy downside move. Though Facebook shares didn’t move to lower lows on Tuesday, his bigger-picture analysis still stands.
Instead, an object-oriented trading lesson is ripe to be picked from the pullback. That is, the potential for a serious crackdown on the way Facebook accepts advertisements wasn’t the reason FB stock tanked. It was just the excise some nervous shareholders were waiting for to bail out.
There were a handful of red flags many veteran traders might notice in retrospect. Two of them readily stand out to even the novice trader though.
One of them is the simple fact that Facebook shares were struggling to get over the technical hump around $173.30. That line had been tested several times since late July, and though the stock poked its head above that line a few times in the meantime, clearly there was something about it holding Facebook shares back. The fact that FB was up a whopping 48% since the beginning of the year may have been a contributing factor.
Nevertheless, the resistance at $173.30 could have just as easily been a breakout line in the sand, holding the stock back enough just to let the bulls build up a head of steam. How does one know a stock may be ready to pivot in the other direction?
We don’t know that for sure, but we got such hints from the volume data leading up to Monday’s meltdown.
The two lines at the bottom of the graph are volume-based indicators. The upper one is a Chaikin money flow line, and the lower one is an on-balance volume indicator. They both more or less tell the same story though, which is an indication of how much or how little volume is backing a trend’s apparent undertow. In this case, neither line was pointed in a decisive, upward direction headed into Monday’s meltdown, ultimately indicating there wasn’t a lot of buying interest in FB even before Monday. In fact, the Chaikin line wad edging lower late last week.
A rally needs participants if it’s to start, and persist.
There’s a third factor in play as well that was working against Facebook shares as of July, though it’s not evident until one zooms out to the long-term weekly chart of FB that also points out where a key support line (really, two support lines) are waiting.
Take a look. From this distance we can see Facebook shares have been trapped in a rising trading range going back to early 2014 (framed by the red, dashed lines). The upper edge of that zone was bumped into in late July. If history repeats itself, we’re now poised for a move back to the lower edge of the range, currently at $140 and rising.
That’s just the worst-case scenario though. There’s also a reasonably good chance FB stock will find support at its 200-day moving average line (green) currently at $150 as it has several times since early 2015.
Bottom Line for FB Stock
It’s not something most fundamentally-oriented news hawks think about much. Their M.O. is usually connecting the dots between headlines, results and that particular stock’s ebbs and flows. While the fundamentals matter, they’re not all that matters all the time. Sometimes, a stock’s going to do what a stock’s going to do, though it may be more accurate to say a stock’s going to do what traders subconsciously want it to do once they get the right catalyst. This appears to be what ultimately up-ended FB early this week, a move that had been mentally planned for weeks.
The good news is, along those same lines, the recovery move for FB stock has also already been planned, even if most traders don’t even realize it yet.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
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