Facebook shares opened Wednesday, Dec. 26, at $126.00 and then moved above my weekly pivot at $129.87, which indicates that the stock can rebound to its 200-week simple moving average or "reversion to the mean" at $135.67 by year end. This is a short-term trading opportunity, as the stock will likely remain deep in bear market territory.
Shares of the social media giant closed Christmas Eve at $124.06, down 29.7% year to date and deep into bear market territory at 43.3% below the all-time intraday high of $218.62 set on July 25. The stock set its 2018 low of $123.02 on Dec. 24, and a positive divergence in weekly slow stochastics suggests that a bear market rally should occur.
The company had suffered from privacy scandals during the year that were forgiven going into the high that was set on July 25. This was the day that Facebook reported quarterly earnings that were quite disappointing, resulting in a huge price gap lower on July 26, which eventually resulted in a "death cross" formation confirmed on Sept. 20.
Despite this turmoil, keep in mind that Facebook remains the leading social media platform on the planet. It's not just Facebook; its other platforms doing well are Instagram, WhatsApp and Messenger. The company should continue to generate a significant portion of the digital advertising market and will likely show an increase in products sold on Facebook for the holiday season. This should be reflected in its earnings report to be released on Jan. 29, with the preliminary results projected to be earnings per share of $2.17.
The daily chart for Facebook
The daily chart for Facebook shows a huge price gap lower on July 26 after the all-time intraday high of $218.62 on July 25. The stock was in recovery mode following the Cambridge Analytica scandal, and then a warning on revenue growth on July 25 caused that huge price gap lower on July 26. The stock gapped below my semiannual pivot at $202.46, which is the highest horizontal line. The second line from the bottom is my annual pivot of $162.65, which was a magnet between Sept. 6 and Oct. 3. The stock opened below my pivot on Wednesday, Dec. 26, at $129.87, and then consolidated above this level as the day progressed.
The weekly chart for Facebook
The weekly chart for Facebook is neutral, with the stock below its five-week modified moving average of $138.90 and below its 200-week simple moving average at $135.67, which is the "reversion to the mean." The stock set its 2018 low of $123.02 on Christmas Eve, but its 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 21.47, rising above the oversold threshold of 20.00.
Note that, when the stock set its all-time high on July 25, the stochastic reading was above 90.00 at 93.47, which I describe as an "inflating parabolic bubble" and consider to be the first technical warning that justified reducing holdings.
Given this analysis, investors should buy Facebook shares on weakness to my weekly pivot at $129.87 and reduce holdings on strength to the 200-week simple moving average at $135.67.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.