Facebook, Inc. (FB) stock rallied to a three-month high on Thursday after the company beat third quarter profit and revenue estimates. However, it was a mixed session because the social media giant gapped up and posted the day's high a few minutes after the opening bell before pulling back throughout the day and closing near the intraday low. The reversal highlighted hidden selling pressure while warning new investors that gains may be limited in coming weeks.
Technical and political headwinds are likely to drive price action well into 2020, with massive overhead supply around $200 still in place after July 2018's 41-point sell gap and down day. The stock posted the highest selling volume in the past six years in that session, with shareholders hitting the sidelines after the company warned that privacy issues following the Cambridge Analytica scandal were taking a toll on user interaction.
That loss of trust has spiraled into a series of international accusations and Congressional hearings in the past year. It has clearly affected promising initiatives like the Libra cryptocurrency roll-out, with Federal regulators unlikely to allow the program to go forward. More importantly, we're headed into a presidential election year, with both parties proposing broad-based anti-trust action against "too-big-to-fail" tech giants.
FB Long-Term Chart (2012 – 2019)
The company came public in a widely anticipated offering in May 2012, opening in the low $40s and selling off into the upper $30s in the first session, The newly minted stock posted an all-time low in the upper teens in September and turned higher, but it took another year for the recovery wave to reach the IPO opening print. An immediate breakout gathered traction, lifting into the low $70s in the next six months.
The uptrend then eased into a rising channel that contained price action for more than five years. The rally posted an all-time high a few points under channel resistance in July 2018 and turned sharply lower in a massive high-volume sell gap that dumped the stock into channel support. A weak bounce failed in August, giving way to a downtick that broke support in September, triggering a steep decline to a two-year low at $123 in December. The big gap remains unfilled, despite a strong bounce into the summer of 2019.
The monthly stochastics oscillator crossed into a long-term sell cycle from the overbought zone in June 2019, predicting relative weakness into year end, and still hasn't reached the oversold zone. Meanwhile, seven months of testing at the underside of the broken channel have failed to generate a breakout. Taken together, sellers are in an advantageous position to engineer a reversal and decline that tests 2019 lows.
FB Short-Term Chart (2017 – 2019)
The on-balance volume (OBV) accumulation-distribution indicator posted a long series of new highs into July 2018 and rolled over with price, entering a distribution phase that ended in November, a month before the stock bottomed out. Subsequent buying interest faded in April 2019, well below the prior peak, giving way to limp sideways action that reflects growing caution. OBV has barely budged since the earnings report, indicating that the positive catalyst has been insufficient to break the holding pattern.
A Fibonacci grid stretched across the 2018 sell-off places the April 2019 high at the .786 retracement, while the rally into July mounted harmonic resistance. It failed the breakout a few weeks later, reinforcing tough resistance that is perfectly aligned with the psychological $200 level. This barrier is unlikely to break in the coming weeks, with adverse relative strength cycles and the unfilled gap generating a steady flow of selling pressure.
The Bottom Line
It appears that short-term upside is limited, despite the positive reaction to Facebook's third quarter earnings report.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.