Facebook, Inc. (FB) is set to report earnings after the closing bell on Wednesday, April 24, with the stock still recovering from a huge price gap lower that occurred on July 26 on an earnings miss. This was the fall-out from the social media giant's privacy scandals.
The stock closed Tuesday, April 23, at $183.78, up 40.2% year to date and in bull market territory at 49.4% above its Dec. 24 low of $123.02. However, the stock is still in correction territory at 15.9% below its all-time intraday high of $218.62 set on July 25, 2018. In terms of my analytics, Facebook stock is above its annual pivot at $181.70, with quarterly and semiannual risky levels at $187.17 and $189.47 vs. the recovery high of $188.30 set on Aug. 7, 2018. This would be an appropriate area at which to sell shares on strength.
Analysts expect Facebook to report earnings per share of $1.65 to $1.74 in its upcoming confessional. The stock is not a value play, as its P/E ratio is elevated at 23.97 without a dividend, according to Macrotrends. The S&P 500 has a multiple of 17.6.
Despite scandals and congressional testimony, earnings should remain solid. Facebook is still the leading social media platform on the planet. The company is 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.
The daily chart for Facebook
The daily chart for Facebook shows that the stock has been above a "golden cross" since April 3, when its 50-day simple moving average rose above its 200-day simple moving average, indicating that higher prices would follow. Today, the 50-day and 200-day simple moving averages are $169.80 and $162.30, respectively. Note the huge price gap lower that occurred on July 26 and the recovery high of $188.30 set on Aug. 7.
On March 29, the stock closed at $166.69, which was an important input to my analytics. This resulted in a monthly value level well below the market at $144.13. In addition, we now have a quarterly risky level in the mix today at $187.14.
The weekly chart for Facebook
The weekly chart for Facebook is positive but overbought, with the stock above its five-week modified moving average at $172.59 and above its 200-week simple moving average, or "reversion to the mean," at $142.68. The stock has been above its "reversion to the mean" since the close on Jan. 4. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 90.64, moving above the threshold of 90.00 as an "inflating parabolic bubble." This is a technical warning to reducing holdings.
Trading strategy: Reduce holdings on strength to the quarterly and semiannual risky levels at $187.14 and $189.47, respectively, or on a break below the annual pivot at $181.70. Buy Facebook shares on weakness to the 200-day simple moving average at $162.30.
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 semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February and March. The quarterly level was changed at the end of March.
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. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.