Facebook Inc (FB) has risen sharply from the December low in the last week, gaining ten points in straight up price action that’s now entered the November breakaway gap. While the uptick has relieved recent shareholder anxiety, it marks a perfect level to sell or take profits because the big hole should end the upside and trigger a pullback that offers better long-side entries at lower prices.

This stock tends to post the majority of quarterly gains or losses within a few sessions of its earnings release, and it may be no different this time around, with the Feb. 1 confessional offering insight after the company was accused of disseminating fake news during the presidential election. Even so, it’s hard to imagine that negative publicity has hurt growing ad revenues or the company’s endless quest to transform eyeballs into profits.

FB Long-Term Chart (2012–2017)

FB

The company came onto the public exchanges in a poorly managed 2012 IPO, with the opening print near $42 triggering a 3-point rally, followed by a three-month decline into the upper teens. The September 2012 low at $17.55 marked the all-time low, ahead of a multi-legged recovery that reached the post offering high in September 2013. It broke out into the fourth quarter, peaking in the low-70s in March 2014.

Price action then eased into a rising channel that marked significant institutional interest, with the pattern containing the uptrend for nearly three years. The August 2015 mini flash crash triggered a severe test of channel support, which held despite a 7-point intraday violation. The stock posted a new high just two months later, resuming its upward trajectory despite mixed conditions throughout the tech universe at that time.

The stock is now engaged in the fourth monthly Stochastics sell cycle in its 5-year history and the first since January 2016 when broad benchmarks fell to multi-month lows. The current cycle is deeper than any downturn since the post-IPO decline, telling market players to be cautious with long positons, even though the price is holding within the multiyear rising channel.

FB Short-term Chart (2015–2017)

FB

The channel has aligned tightly with the 200-day EMA in the last two years, yielding five successful tests in 2015 and 2016. The decline that started in October 2016 pierced the moving average and settled on the channel, grinding out a six-week basing pattern, ahead of the recent buying surge. This turnaround signals another successful test but overhead supply has now grown to the highest level since early 2016.

On Balance Volume (OBV) highlights this deficiency, entering a distribution phase in October that reached a 5-month low in December. Unfortunately, the vertical rally into January has attracted inadequate buying interest to overcome the prior deficit or match current price production, signaling a minor bearish divergence that should limit gains into February earnings.

In addition, the first bounce into a breakaway gap denotes a sell short trade setup, with aggressive sellers likely to reload positions in coming days. A rally above $127.50 is needed to overcome the bearish signal because that price level will clear the gap and set the stage for a test at the fourth quarter bull market high. Taken with positive signals following the bounce at channel support, the stock has entered a mixed environment that favors neither bulls nor bears in the short-term.

The Bottom Line

Facebook capped off an excellent week on Tuesday with a fifth vertical rally day that entered the October downside breakaway gap while nearing the .618 Fibonacci selloff retracement level. These twin barriers should end the upside in coming sessions, triggering a sizable reversal that drops the stock below $120.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>

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