Facebook, Inc. (FB) missed earnings per share (EPS) estimates when it reported results after the closing bell on April 29. The stock gapped higher on April 30 and moved above its monthly pivot at $202.60 as May began. The upside potential is to its semiannual risky level at $225.99, which would be a new all-time high if tested.
The social media giant has missed EPS estimates in two of the past four quarters, mainly on warnings related to advertising income. The stock is not cheap, as its P/E ratio is elevated at 28.94 without offering a dividend, according to Macrotrends.
The stock ended last week at $212.35, up just 3.5% year to date and in bull market territory at 54.9% above its March 18 low of $137.10. The stock is 5.3% below its all-time intraday high of $224.20 set on Jan. 29.
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 rose above the 200-day simple moving average to indicate that higher prices lie ahead. The stock slipped to a test of its 200-day simple moving average at $161.33 on June 3, 2019, as a buying opportunity. The 200-day simple moving average was tested again at $175.30 on Oct. 2 as another buying opportunity.
The stock set its all-time intraday high of $224.20 on Jan. 29 in anticipation of a positive earnings report released after the close that day. Good news was priced into this beat, and the stock gapped lower on Jan. 30. This price gap was filled on strength on Feb. 20.
Facebook stock then crashed below its 50-day simple moving average on Feb. 24 and then below the 200-day simple moving average on March 4. This led to the March 18 low of $137.10.
The V-shaped bottom for the stock resulted in a test of the quarterly risky level at $188.32 and then a test of the May risky level at $202.60 on May 1. The upside potential is now to its semiannual risky level at $225.49.
The weekly chart for Facebook
The weekly chart for Facebook is positive, with the stock above its five-week modified moving average of $189.23. The stock is also above its 200-week simple moving average, or reversion to the mean, at $166.25. This average provided a buying opportunity between the weeks of March 13 and April 10.
The 12 x 3 x 3 weekly slow stochastic reading rose to 57.23 last week, up from 46.38 on May 1. At the January high, this reading was above 90.00, which put the stock in an "inflating parabolic bubble" formation, and bubbles always pop.
Trading strategy: Buy Facebook shares on weakness to the monthly and quarterly value levels at $202.60 and $188.31, and reduce holdings on strength to the semiannual risky level at $225.49.
How to use my value levels and risky levels: The closing prices on Dec. 31, 2019, were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.
The second quarter 2020 level was established based upon the March 31 close, and the monthly level for May was established based upon the April 30 close. New weekly levels are calculated after the end of each week, and new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, while annual levels remain 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.