Facebook, Inc. (FB) stock closed 2019 at $205.25 and closed Monday, Jan. 13, at $221.91, up 8.1% so far in 2020. The stock is in bull market territory at 80.4% above the low of $123.02 posted on Dec. 24, 2018. The stock has been setting new highs almost daily including on Monday, Jan. 13, at $221.97.
Facebook has had a tough time beating earnings per share (EPS) estimates in recent quarters, but the momentum run-up for the stock remains strong. The stock is not cheap. Its P/E ratio is 34.83, and the company does not offer a dividend, according to Macrotrends.
The bull market for Facebook originally peaked at $218.61 during the week of July 27, 2018. From this high, shares of Facebook plunged by a bear market 43.7% to a low of $123.02 on Dec. 24, 2018. From this low, shares of Facebook have been in a bull market run of 80% to the Jan. 13 all-time intraday high of $221.97. Given a bear market correction in 2020, the downside risk would be to Facebook's 200-week simple moving average (SMA) at $160.37, which would equate to a decline of 27%.
The close of $205.25 on Dec. 31, 2019, was an important input to my proprietary analytics. The monthly value level for January is $191.54, with the first quarterly value level at $178.64. The upside potential is to the semiannual risky level for the first half of the year at $225.49.
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 SMA rose above the 200-day SMA to indicate that higher prices lie ahead. The stock slipped to a test of its 200-day SMA at $161.33 on June 3, 2019, as a buying opportunity. The 200-day SMA was tested again at $175.30 on Oct. 2 as another buying opportunity.
The horizontal lines below the market are the monthly value level for January at $191.54 and the first quarterly value level at $178.64. The semiannual risky level for the first half of 2020 is $225.49.
The weekly chart for Facebook
The weekly chart for Facebook is positive but extremely overbought, with the stock above its five-week modified moving average of $207.98. The stock is well above its 200-week SMA, or "reversion to the mean," at $160.37, which was a magnet between the weeks of Nov. 23, 2018, and Jan. 4, 2019, when the average rose from $134.20 and $135.97. The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 92.77 this week, well above the overbought threshold of 80.00 and with a reading above 90.00 placing the stock in an "inflating parabolic bubble" formation.
Trading strategy: Buy Facebook shares on weakness to the monthly and quarterly value levels at $191.54 and $178.64, respectively, and reduce holdings on strength to the semiannual risky level at $225.49.
How to use my value levels and risky levels: The closing prices of stocks on Dec. 31, 2019, were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual, and annual levels. Each calculation uses the last nine closes in these time horizons. New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.
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 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 typically is 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.