Social media stocks have been the talk of Wall Street for much of the past few years, but price action over the past several weeks suggests that the uptrend is in jeopardy and that the group could be gearing up for a long-term move lower. In the paragraphs below, we'll take a closer look at key charts from across the social media sector and try to determine how active traders will be looking to trade the move over the months ahead. (For related reading, see: 3 Chart Patterns That Suggest It's Time to Trade Technology Stocks.)
The predominant uptrend that has powered the social media sector over several years is clearly shown on the chart of the Global X Social Media Index ETF. As you can see, the dotted trendline and the support of the 200-day moving average acted as a reliable guide for traders looking to determine the placement of their buy and stop orders. Given the break below the support earlier this year, the conviction of the uptrend is now in question, and for followers of technical analysis, it has already reversed. On the chart, you'll find that the sharp sell-off over the past couple of months has resulted in the 50-day moving average crossing below the 200-day moving average, known as the death cross, which is used by traders to mark the beginning of a long-term downtrend. Based on this pattern, we'd expect active traders to set their stop losses above $34.76 in case of a sudden shift in fundamentals. (For further reading, see: 3 Charts That Are Warning of a Pullback in Technology.)
There are no social media companies more widely followed than Facebook, which as of late has struggled to maintain its uptrend. The sharp sell-off in July sent the price of the stock below the 200-day moving average, which is now acting as a barrier to a move higher, and it appears as though it is about to drag down the 50-day moving average, which as discussed above would signal the beginning of a long-term downtrend. Traders will keep a close eye on the crossover between the moving averages to see if it acts as a catalyst for a sharp move to the downside. Target prices will most likely be set near the 2018 low of $149.02. (For more, see: What Technical Tools Can I Use to Measure Momentum?)
Another social media chart with an interesting chart pattern belongs to Twitter. As you can see below, the sell-off in late July found support near the 200-day moving average, which is behavior that is expected from the long-term moving averages. It interesting to see how the 200-day moving average was able to provide support for several weeks but how the bulls eventually lost conviction in a significant bounce. Since then, the price has started to drift lower. With the downward-sloping 50-day moving average, active traders will likely keep a close eye on this chart for confirmed technical sell signals, which could be a matter of days away. Stop-loss orders will likely be placed above the long-term moving averages in case of a major shift in fundamentals. (For more, see: Simple Moving Averages Make Trends Stand Out.)
The Bottom Line
Social media stocks have been some of the darlings of Wall Street over the past couple of years, but recent closes below key levels of support suggest that the uptrends could be reversing. Active traders will likely look to the charts above for ideas for determining the placement of orders, and the bulls may want to remain on the sidelines until there is a clearer sign of a move higher. (For more, see: Analyzing Chart Patterns.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.