(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Facebook Inc. (FB) shares have plunged in recent days on concerns about growth and government investigations into its practices. Now, after falling by 20%, technical trading patterns indicate that the stock has bottomed and could rebound by as much as 25%. That would push the stock back to $185 a share, its peak before the latest downdraft.
A wave of selling took hold after news broke on Facebook's private data on 50 million users had been compromised, slashing Facebook's market value by $94 billion in the 12-day period ending March 28. Volume surged to the highest levels in years as investors dumped the stock. At the beginning of that sell-off, a March 19 Investopedia technical analysis said Facebook's stock was likely to fall 20% to $148. Most importantly, Facebook's shares have held at that critical $148 support level, from which it's begun to rebound. (See also: Why Facebook Shares Could Fall 20%.)
A 25% Rebound
Facebook's stock could be due to rise all the way back to $185, an increase of nearly 25% from its closing price around $153 on Wednesday. The first test will come at 8.5% higher at $166, which serves as a technical resistance level, which first served as a technical support level as the stock was falling and was noted in the March 19 article. But now that support level turns to resistance as the stock rises, and should the stock rise above resistance, it will likely refill the gap created when shares first cratered on March 19.
Bottom Put In
The 5-minute chart shows rather nicely how shares of Facebook held support around $166, and once that support broke, shares plunged all the way to $149, just above the $148 level. But the chart is now showing how the stock has held well on surging volume, while also breaking free of the short-term downtrend that had formed as the stock fell. Additionally, the stock was able to retest that trendline over the past two days, and that suggests a bottoming process has been put into place.
The relative strength index (RSI) also reached oversold levels, with a reading plunging below 30, to a low of 25, and signals that selling, for now, has been overdone.
Rising volume, near-panic selling and the appearance of a bottoming process at support suggests that the shares are due for a rebound. How much that rebound amounts to will depend heavily on any news that that comes from the company.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five 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 recommendations made during the past twelve months. Past performance is not indicative of future performance.