Facebook Stock Tests Semiannual Risky Level

Facebook, Inc. (FB) stock had the momentum to set an all-time intraday high of $250.15 on July 13. This gave investors the opportunity to book profits, as its semiannual risky level is $245.78.

The social media giant missed earnings per share (EPS) estimates in two of the past four quarters. The stock is not cheap, as its P/E ratio is elevated at 32.84 without offering a dividend, according to Macrotrends.

Facebook stock closed Wednesday, July 15, at $240.28, up 17.1% year to date and in bull market territory at 75.3% above its March 18 low of $137.10. The stock is 3.9% below its all-time intraday high of $250.15 set on July 13.

The daily chart for Facebook

The daily chart for Facebook shows a first quarter decline of 38.8% from its Jan. 29 high of $224.20 to the March 18 low or $137.10. The stock then rallied 82% to its all-time intraday high of $250.15 set on July 13.

The stock has been above a golden cross since June 4, which tracked the stock to its all-time high. A golden cross occurs when the 50-day simple moving average rises above the 200-day simple moving average to indicate that higher prices lie ahead.

Facebook stock failed to hold its annual value level at $185.93 on March 25 and then returned to this level on April 23. A pivot is almost always is retested during its time frame, and that has been the case for this stock.

Tests of its semiannual risky level at $245.78 occurred between July 7 and July 13. The stock is above its 50-day and 200-day simple moving averages at $229.26 and $201.65. It's also above its monthly value level for July at $219.91.

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 $228.65. The stock is also above its 200-week simple moving average, or reversion to the mean, at $171.54. 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 is projected to be overbought this week with a reading of 85.45. At the January high, this reading was above 90.00, which put the stock in an "inflating parabolic bubble" formation, and bubbles always pop. The bubble popped with the bear market decline, but the stock then rose to a higher all-time high.

Trading strategy: Buy Facebook stock on weakness to its monthly value level at $219.91 and reduce holdings on strength to the semiannual risky level at $245.78.

How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. The annual levels remain on the charts. The monthly level for July was based upon the last nine monthly closes, the third quarter level was based upon the last nine quarterly closes, and the second half 2020 level was based upon the last nine mid-year closes. New weekly levels are calculated after the end of each week.

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.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.