Facebook, Inc. (FB) shares fell more than 41 points in a single July session right after posting an all-time high at $218.62 and dropped an additional 53 points into December. It's likely that this rapid decline trapped many shareholders who decided to book losses into year end to reduce their 2018 tax bill. Fortunately for remaining bulls, this exodus may have exhausted selling pressure, setting up favorable conditions for a strong first quarter recovery rally.
Of course, timing is everything in the financial markets, and buying the stock too early could be disastrous, especially with broad benchmarks in full retreat on the first trading day of 2019. However, it isn't too early to draw lines and squiggles on monthly and weekly charts, deciding if the six-month decline has reached time and price targets that are likely to generate a major reversal.
FB Monthly Chart (2012 – 2018)
The social media giant came public in a poorly executed initial offering in May 2012, opening in the mid-$40s and dropping like a rock into June. It bounced in the mid-$20s, but the damage was done, ending the recovery attempt just two weeks later. New lows into September exhausted selling pressure in the mid-teens, while two tests at that support level completed a triple bottom reversal in November.
The stock completed a round trip into the IPO opening print in September 2013 and took off in a dramatic breakout that reached the low $70s in the first quarter of 2014. Price action then eased into a broad rising channel that held intact into the third quarter of 2018 while the stock price nearly tripled. An August channel breakdown signaled a major change in character, putting shareholders on the defensive for the first time in six years.
The first warning came in December 2017, when the monthly stochastics oscillator crossed into a sell cycle even though the stock was trading near an all-time high. The decline into March 2018 triggered a fresh buy signal at the same level as the January 2017 reversal, but the rally wave into July generated a major bull trap. The indicator has now dropped into the oversold level and the 50-month exponential moving average (EMA) for the first time since Facebook became a public company.
FB Weekly Chart (2016 – 2018)
The weekly stochastics oscillator crossed into a sell cycle in July 2018 and failed a November buy signal in early December. It's about to cross back into the oversold zone, joining the longer-term indicator, but the convergence won't set off a contrary signal due to the recent failure. However, it does tell market players to sit up and pay attention because the decline is nearing or has reached a potential turning point.
The sell-off broke the .786 Fibonacci retracement of the 2016 to 2018 uptrend at $135, which also marks the 200-week EMA, and failed an attempt to remount broken support into year end. In turn, this price action predicts that the downside could easily reach the 100% retracement level near $113. The boundaries of the descending channel in place since August 2018 have aligned support and resistance near these price zones, highlighting their importance in coming weeks.
A rally above $135 would now remount broken support and trigger a channel breakout near the 50-month EMA, supporting a multi-month recovery wave that could reach the $160s or $170s. On the flip side, a decline through the December low at $123 would confirm the recent breakdown, raising the odds that the downside will continue toward $113, with that price zone marking a high-probability turning point.
The Bottom Line
Facebook has reached deep support while relative strength indicators have dropped to their lowest levels in the stock's public history, but it is best to avoid exposure until short-term price action favors higher prices.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.