Facebook, Inc. (FB) stock surged more than 10% in Thursday's session after the social media giant beat fourth quarter profit and revenue estimates, trapping short sellers expecting privacy issues and corporate missteps to yield more somber results. The stock held its ground into the weekend but added no points, leading newly minted bulls to wonder if they'll get caught holding the bag ahead of a reversal into the $150s.
Is it time to throw caution to the wind and buy Facebook stock, or should shareholders use this opportunity to head back to the sidelines? There's no right or wrong answer, but it's clear that short covering generated the majority of last week's upside, and this rocket fuel won't last forever. So, at some point, committed buyers will need to step up and steer the bounce off 2018's brutal 95-point decline.
It's hard to imagine that happening with headlines like, "Facebook Now Willing to Cause Actual Harm to Children" keeping potential investors on the sidelines, even after the company insisted, "We've fundamentally changed how we run our company" during the earnings presentation. However, cheerleading analysts have been quick to jump on board this new and improved version, with at least six research firms raising estimates.
We've learned from scandals involving Chipotle Mexican Grill, Inc. (CMG) and Well Fargo & Company (WFC) that it can take years to restore damaged sentiment. Few folks believe that the social media giant has addressed all of the privacy issues raised in the past year because that would force the company to abandon monetization policies that turn big profits by selling data to third parties. As a result, regulatory agencies and a concerned public are likely to maintain pressure on the company, keeping price action stuck well below last year's all-time high.
FB Monthly Chart (2013 – 2019)
The stock broke out above resistance at the 2012 high in the mid-$30s in 2013, entering a powerful trend advance that eased into a rising channel (logarithmic scale) in 2014. It held those boundaries into July 2018's all-time high at $218.62 and turned sharply lower, breaking down in September. The violation set off major sell signals, generating additional downside that reached support at the 50-month exponential moving average (EMA) in December.
The monthly stochastics oscillator entered a multi-wave sell cycle in January 2018, finally reaching the oversold level in October. It crossed into a new buy cycle in January 2019, predicting at least six to nine months of relative strength. Taken together with the bounce at long-term moving average support, the current uptick is likely to continue into a test at channel resistance now located above $190.
FB Daily Chart (2016 – 2019)
It's hard to choose a starting point for a Fibonacci rally grid, but the August 2015 mini flash crash does an admiral job lining up with key retracement levels. The 2018 decline broke the March low at $149.02 in October, ending a string of higher highs and higher lows going back to the 2012 IPO, finally settling at the .618 retracement level. It remounted the low after earnings, realigning strong support at the gap bottom. However, the 2018 breakdown now raises the odds for a long-term top, with the failed breakout above the February high (red line) aligned at channel resistance.
The big gap also remounted the broken 200-day EMA, shifting power back to bulls, who are likely to bid the stock higher in the coming weeks. The .786 retracement of the six-month decline is also situated near channel and failed breakout resistance, highlighting the importance of correct positioning if this uptick reaches the $190s. Given this tough and likely impenetrable barrier, shareholders should consider taking profits while short sellers look at aggressive new entries.
The Bottom Line
Facebook stock is likely to trade higher in coming months, riding a positive recovery cycle following a brutal 2018 decline. However, the long-term uptrend is now broken, suggesting that aggressive sellers will return in force in the $190s.
Disclosure: The author held no positions in aforementioned securities at the time of publication.