Facebook, Inc. (FB) has bounced back to February's bull market high after a March data-sharing scandal dumped the social media giant 36 points in less than two weeks. Bulls now hope for a breakout that opens the door to much higher prices, but bears hold the short-term advantage and could shake out a large supply of weak-handed shareholders before a new trend advance sets into motion.
The stock fell from high to low in 36 sessions, bottomed out on March 26 and turned higher into June, with the return trip taking 48 sessions. The V-pattern in place following this bipolar action looks unstable and in need of a higher low to support a healthy breakout above $200. As a result, a pullback that tests or fills the April 26 gap between $169 and $170 appears likely, with the 200-day exponential moving average (EMA) and a head and shoulders neckline cutting through that level.
Still, the strong recovery effort into June reflects considerable momentum that could generate a quick buying spike into channel resistance at $208 before bears get the upper hand and generate a multi-week reversal. Trend followers may wish to sit on their hands if that happens, awaiting a more advantageous trade setup that might not unfold until the company reports second quarter earnings on July 25. (See also: Facebook Is Feeling the Pinch of Platform Bugs.)
FB Long-Term Chart (2012 – 2018)
The stock sold off from $45 to $17.55 following a poorly received May 2012 initial public offering, bottoming out in September. It spent many months building a rounded basing pattern, finally turning higher in July 2013 and piercing resistance at the IPO opening print in September. The uptrend added to gains at a rapid pace into March 2014 and eased into shallow orientation that tracked a rising highs trendline (red line) for more than four years.
Multiple breakout attempts failed while declines found support at or near the 50-week EMA. The higher low posted in the fourth quarter of 2016 signaled a change in character, ahead of a rally that mounted resistance in April 2017. The stock tested new support for three months and took off in a fresh uptrend that completed a four-year rising channel (blue shade) after posting an all-time high at $195.32 on the first trading day of February.
The decline into April ended right at channel support near $150, giving way to an uptick that unfolded at the same trajectory as the prior decline. In turn, this price action has completed a V-shaped recovery pattern that has carved few support levels between $150 and $195. As a result, lower prices now mark the path of least resistance, shaking out bulls until more committed buyers step in to support a sustained breakout.
FB Short-Term Chart (2016 – 2018)
Price action between October 2017 and March 2018 carved a head and shoulders top with a horizontal neckline at $169. A Fibonacci grid stretched across the 2016 into 2018 uptrend provides context for this bearish pattern, with the head and shoulders breakdown cutting through the .382 retracement level before finding support at the .50 retracement. The stock remounted the neckline on April 26, trapping short sellers in a gap that may act as a magnetic target during the next pullback.
On-balance volume (OBV) topped out in November 2017 following a shallow but persistent accumulation wave and turned lower into March, holding well above prior swing lows. Buying pressure into June lifted the indicator to an all-time high, setting off a bullish divergence that predicts price will eventually play catch-up. This bodes well for a breakout but doesn't reduce the odds for an intermediate downturn in the next few weeks. (For more, see: Facebook Bug Opened Privacy Settings for 14M Users.)
The Bottom Line
Facebook stock broke down from a head and shoulders topping pattern in March but remounted the neckline in April, ahead of a recovery wave that has now reached February's bull market high. This level marks resistance, raising the odds for a downturn that may test new support around $170. (For additional reading, check out: 5 Reasons Facebook Is a Bargain.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>