Facebook's Stock May Plunge 8% Short Term

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Facebook Inc.'s (FB) shares have rebounded by over 8% since reporting first-quarter results on April 24, and by over 13% since reaching an intraday low of approximately $149 on March 27. But the social media giant may be poised to give back a big chunk of those gains, and fall by about 8% from its current price of around $172.50. 

Facebook reported first-quarter earnings results that topped analysts estimates by 27%, according to Ycharts, while revenue topped forecast by nearly 5%, a monster beat, which sent shares of Facebook soaring. The strong results reminded investors of the massive earnings and revenue potential the company has after weeks of negative sentiments in the wake of the Cambridge Analytica fallout. 

^SPX data by YCharts

8% Drop

Facebook's technical chart shows a stock that recently ran into levels of technical resistance at approximately $177, while also hitting a downtrend that has now been in place since the end of January. Both will likely cause Facebook shares to reverse, pushing the stock lower, back towards $159.50. That is the price where the stock jumped higher following the strong results, creating a gap. It is likely also the price at which the stock will fall in an attempt to refill the gap. 

The chart above also shows how Facebook's shares plunged in the middle of March to levels not seen in over a year, before ultimately finding technical support around $149. Shares recovered nicely until hitting technical resistance around $166. But it was the robust earnings release that sent shares soaring above resistance back to $177. (For more, see also: Facebook Stock Pressured on #DeleteFacebook Trend.)

Weak Relative Strength

The relative strength index (RSI) for Facebook has also been trending lower since May of 2017, as the stock price increased, a bearish divergence. The RSI reached overbought levels, well above 70 a year ago, while just recently hitting oversold conditions below 30, at the end of March. For now, the RSI signals further declines are ahead for the stock. 

Lack of Volume

Volume has been relatively weak since the stock started rising in the middle of April when comparing it to the volume levels as the stock was falling. It serves as an indication that buyers do not have a strong conviction for the stock, or sellers simply eased up in an attempt to get better prices. 

For now, Facebook's stock is not out of the woods. However, should Facebook's stock rise above $178, resulting in a breakout, sentiment would quickly turn bullish. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the founder of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of two to three years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.