FB Stock: Bears Are Gaining Momentum
Facebook Inc (NASDAQ:FB) has lost some considerable ground since my last report of FB stock was published. In my previous report on Facebook stock, I had outlined that a bearish pattern was set to execute, and that bearish implications were set to follow. Since that report, levels of support have fallen and the bearish headwinds on Facebook stock continue to develop.
It is not just Facebook stock that is under pressure. The NASDAQ index has seen selling pressure, and heavyweights like Apple Inc. (NASDAQ:AAPL), Netflix, Inc. (NASDAQ:NFLX), and Google (otherwise known as Alphabet Inc (NASDAQ:GOOG)) have seen their share of price weakness.
As a trader, I have seen such price moves in which an entire sector moves in tandem, and much of the gains or losses have little to do with actual company fundamentals. Money managers refer to this phenomenon as sector rotation. This rotation is a result of using macro-economic top-down analysis to develop investment strategies. The major driver behind this analysis is government policy.
The new president of the United States is set to step into office in January. The new president represents change, which will result in new economic policies. These money managers seem to believe that the new government policies are not as friendly toward growth stocks like Facebook. This has resulted in a market that seems a bit disconnected, as the Dow Jones Industrial Average (DJIA) index is forging new all-time highs, but the NASDAQ index is lagging behind.
The following Facebook stock chart illustrates the bearish developments.
Chart courtesy of StockCharts.com
The pattern that FB stock completed is a rising wedge. A rising wedge is a technical pattern that contains two converging trend lines, in which both trend lines slope upward. These two trend lines act as support and resistance. The price will oscillate between these two levels until the price manages to gain enough strength to break out of this pattern. When the price breaks out, the pattern is complete. On average, these patterns break downward, so this pattern is seen in a bearish light.
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Facebook stock quickly reaffirmed this bearish pattern by trading back and testing the level of support from underneath. Traders refer to such a price action as a backtest, and it serves to reaffirm the pattern. The bearish price objective of the rising wedge is the lower point at which the triangle began to develop. Assuming that this premise is true, FB stock could correct to $72.00. This is a scary number to fathom.
The 200-day moving average has served as a level of support since 2013, when FB stock first started trading above it. The 200-day moving average is the dividing line between stocks trading in a bull market and stocks trading in a bear market. When the share price is above the moving average, it is bullish. When the share price is below the moving average, it is bearish.
This moving average has been penetrated before, but not on a sustained basis. FB stock is currently trading below this level of support, and the inability to trade above it will only act to increase my bearish concerns.
The following Facebook stock chart illustrates one more level of price support that could act to halt the current slide.
Chart courtesy of StockCharts.com
The pattern highlighted on the FB stock chart above is an ascending channel. An ascending channel is created by using two identical trend lines that define the upper and lower bounds. The share price oscillates between these two lines for as long as the trend permits. This channel has defined the bull market in FB stock since 2013, and support has been tested sparsely, but has bounced off it each and every time.
Support from this trend line sits just north of $100.00, and I would hate to see such a defined trend break. If this level does not hold, then the bearish rising wedge will play out, and support at $72.00 will be the next objective.
The Bottom Line on Facebook Stock
I am bearish on Facebook stock, as the bearish signal continues to mount. Even though I did outline possible levels of support on FB stock, I would refrain from trying to catch a bottom. My concerns are becoming widespread within the tech sector as the NASDAQ index is putting in a bearish rising wedge, but it has yet to be completed.