Facebook Upside Limited Despite Strong Quarter

Facebook, Inc. (FB) beat fourth quarter earnings estimates by 24 cents on Wednesday evening, posting earnings per share of $2.21 on $12.97 billion in revenues, which also beat estimates. Revenues rose an astounding 47.3% year over year, with mobile advertising comprising the vast majority of income. Both daily and monthly average users increased 14%, signaling healthy growth despite worldwide penetration and ongoing concerns about Russian bots and hate speech.

The stock fell 5% in 10 minutes after the quarterly report, dropping to $178 before turning sharply higher into the late evening, closing above $194. Price action settled around $190 ahead of Thursday's opening bell, with that level set to test or post an all-time high. Even so, long-term price structure predicts that it will be tough for Facebook to build on post-earnings gains in coming days. (See also: Amazon a Growing Threat to Google, Facebook, Says Ad Tycoon.)

FB Long-Term Chart (2012 – 2018)

The stock sold off following its widely anticipated initial public offering in May 2012, descending from $45 to an all-time low at $17.55 in less than three months. It bounced strongly into 2013, stalling below the IPO opening print in January, and drifted lower into mid-year. That decline found support in the lower $20s, printing a higher low that set the stage for a powerful July breakout.

The initial rally wave peaked at $72.59 in March 2014 and eased into a less vertical trajectory that tracked a 20- to 25-point rising channel. The stock broke channel support during the August 2015 mini flash crash, plunged 10 points and bounced strongly into the close, reinforcing the range-bound pattern. It tested channel resistance six more times before finally breaking out in July 2017.

Price action hugged new support for three months following the breakout and took off in a buying impulse that stalled two weeks later at $175.49. Fractal energy then kicked into gear, carving a new rising channel with a 13- to 15-point width. It tested support in September and December 2017 while reversing at resistance in November 2017 and January 2018. The stock is trading about two points above that barrier ahead of the regular session.

The monthly stochastics oscillator entered a strong buy cycle in February 2017, reaching the overbought level two months later and sticking like glue into January 2018. It crossed to the bear side in November but has not dropped through the overbought line, which is required to set off a long-term sell cycle. That could now happen with a relatively modest pullback to the 50-day exponential moving average (EMA) at $181. (For more, see: Facebook: 7 Secrets You Don't Know.)

FB Short-Term Chart (2016 – 2018)

A 2016 rally stalled above $130 in September, yielding a November reversal that posted the biggest decline in the past 15 months. The sell-off broke the 50-day EMA and settled above $110, building a triple bottom ahead of a strong 2017 recovery wave. The stock has tested the moving average eight times in the past year, repeatedly undercutting it and surging higher. The price zone from that level into channel support at $175 marks the interface between bull and bear power.

On-balance volume (OBV) entered a powerful accumulation phase in early 2014, with significant institutional sponsorship lifting the indicator in a graceful pattern that stalled in the fourth quarter of 2015. It has continued to gain ground since that time, but the shallow trajectory suggests waning interest that could eventually trigger a sizable correction. However, bulls will remain firmly in control as long as the channel pattern remains intact.

A channel breakout will face stiff psychological resistance at the $200 level, limiting post-earnings gains. More likely, the rally will reverse at or just above the channel, trapping euphoric buyers jumping in after the quarterly results. Long-term shareholders can ignore the reversal if it comes, focusing their attention on the $175 to $181 price zone, which must hold for the uptrend to remain intact. (See also: Facebook and Google's Days Are Numbered: Soros.)

The Bottom Line

Facebook has rallied into channel resistance at $190 after a strong fourth quarter earnings report and is likely to reverse off that level, keeping the channel intact. A breakout could gather strength into $200, where selling pressure may trigger a sizable reversal. (For additional reading, check out: Long-Time Tech Analyst Advises Sector Overvalued.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>