Facebook, Inc. (FB) reports second quarter earnings after the closing bell on Wednesday, July 24. The stock is in position to challenge its all-time intraday high of $218.62 set a year ago, but after the close on Tuesday, July 23, the Department of Justice (DOJ) announced that Facebook was one of four FAANG stocks being investigated due to monopoly concerns.
The DOJ will investigate internet activities including search, social media, and online retailing. This is a cloud over earnings for all five FAANG stocks including Facebook.
What we know is that Facebook stock is still consolidating a bear market decline of 43.7% from its all-time intraday high set during the week of July 27, 2018, to its Dec. 24 low of $123.02. Facebook shares opened Wednesday, July 24, at $197.22, staying above the quarterly value level at $193.39, which implies that fines and investigations are already priced in.
Even with this move lower, Facebook stock has been on a roll. At its Tuesday close of $202.36, the stock is up 54.4% year to date and in bull market territory at 64.5% above the Dec. 24 low. Fundamentally, Facebook stock is reasonably priced for a FAANG stock with a P/E ratio of 30.06 without paying a dividend, according to Macrotrends. The DOJ investigation has been a known factor, but now we know that additional news flashes will occur.
After Facebook reported earnings back on July 25, 2018, there was a huge gap lower on July 26 on missed expectations. This included the fall-out from the social media company's privacy scandals, which remain under investigation.
Analysts expect Facebook to post earnings per share of $1.90 to $2.01 when it reports after the closing bell on Wednesday, July 24. Facebook remains the leading social media platform on the planet. It's more than just Facebook – its other platforms are Instagram, WhatsApp, and Messenger. This combination should continue to capture a significant portion of the digital advertising market in the quarters ahead. It seems like a breakup of these entities may occur at some point in the future.
Some on Wall Street are becoming cavalier, saying that Facebook is immune to the big tech investigations, even though the Federal Trade Commission dropped a $5 billion fine on the company. They also cheer the cryptocurrency initiative called Libra. Regulators appear reluctant to let this fly. It seems to me that beating earnings estimates is "in the cards," but the clouds of investigations are rumbling overhead.
The daily chart for Facebook
The daily chart for Facebook shows that the stock has 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 $161.39 on June 3 as a buying opportunity.
The close of $193.00 on June 28 was an important input to my proprietary analytics and resulted in the following key levels. A monthly value level for July is at $186.74, with an annual value level at $181.70. Its quarterly pivot is $193.39, and its semiannual risky level at $219.31, which is above the all-time intraday high of $218.62.
Note the earnings volatility. Back on July 25, 2018, the stock price posted a huge price gap lower. This was a delayed reaction to the Cambridge Analytica scandal. Note the price gap higher on Jan. 31 following an earnings beat. There was also a price gap higher on April 25 despite an earnings miss. The annual value level at $181.70 was a pivot (or magnet) between April 23 and June 14, with 10 days of crisscrosses.
The weekly chart for Facebook
The weekly chart for Facebook is positive but overbought, with the stock above its five-week modified moving average of $193.58. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $149.08, which was a magnet between the weeks of Nov. 23 and Jan. 4, when the average rose from $134.20 to $135.97. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 85.45, up from 82.85 on July 19.
Trading strategy: Buy Facebook shares weakness to the monthly and annual value levels at $186.74 and $181.70, respectively, and reduce holdings on strength to the semiannual risky level at $219.31. The quarterly pivot at $193.39 should remain a magnet.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, most recently on June 28. The quarterly level was changed at the end of June.
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.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.