Facebook Stock Chart Suggests Caution Is Warranted

FB StockFB Stock: Sitting in No Man’s Land

In my last publication on Facebook Inc (NASDAQ:FB) stock, I had to step away from a previous bearish view and assume a neutral stance because the price action on the FB stock chart suggested that higher prices were likely in the interim. Even though bearish signals continued to mount on Facebook stock, stepping aside was the prudent course of action.

The pattern where my original bearish view was derived from is still in play. If FB stock stalls at the current levels, it could indicate that my previous bearish view was not ill-founded.

The following Facebook stock chart illustrates the pattern where my original bearish view was derived from.

fbook1

Chart courtesy of StockCharts.com

The FB stock chart above illustrates the rising wedge that was the basis of my previous bearish view.

A bearish rising wedge is a technical pattern that contains two converging upward-sloping trend lines. One trend line represents resistance and the other trend line represents support. The pattern is created as price oscillates between these two trend lines. The rising wedge is complete when price exits the pattern in either an upward or downward direction.

On average, these patterns break to the downside because support is rising faster than resistance, and it takes quite a lot of buying pressure to maintain a trend line that continues to increase at such an accelerated rate.

The rising wedge was completed in November, when stock exited the pattern in a downward direction following a disappointing earnings announcement. This event is highlighted as a breakdown on the FB stock chart above, and this was where my bearish view on Facebook stock was created.

A completed rising wedge, where price exits in a downward direction, implies bearish consequences. The theory surrounding these patterns is that the price will retreat to the lowest point from which the pattern began to develop. This implies that Facebook stock is set to test the August 2015 lows at $72.00.

The following chart illustrates the price action that caused me to retract my bearish view suggested by the rising wedge.

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Chart courtesy of StockCharts.com

Everything was going to plan after Facebook exited the channel to the downside, and an initial sell-off drove the FB stock price to $114.00.

Over the next two months, the stock traded within a range (highlighted in purple) that at first glance, looked like a continuation pattern developing. But when price exited the pattern in an upward direction, it confirmed that this trading range was in fact a reversal pattern. The confirmation of a reversal pattern indicated that higher prices were likely, and this is the reason I had to step away from my bearish view and assume a neutral stance.

In my previous publication, I had mentioned that this reversal pattern didn’t justify a bullish view because the repercussions from the bearish rising wedge could still manifest. This would occur after stock backtested the rising wedge from beneath. At that time, FB stock would have to continue appreciating in order to accomplish this feat, and there is no reason holding onto a bearish view knowing that price is rising, or needs to rise further, in order to justify this view.

This backtest is now complete and is highlighted on the Facebook stock chart above. This completed backtest may have set up another bearish pattern. When FB stock was rejected by resistance outlined by the rising wedge, it was also rejected by the previous all-time high. This price action has a number of repercussions, because aside from backtesting the rising wedge, a double top may have formed.

Both the rising wedge and double top patterns would be confirmed if FB stock closes below $114.00. Both bearish patterns would be negated if Facebook stock continues to climb. At this current juncture, I remain neutral on the stock, awaiting an outcome.

Bottom Line on FB Stock

Facebook stock has backtested the rising wedge from beneath, and at the same time, was rejected by resistance set out by the previous peak. At this current juncture, caution is warranted until FB stock confirms that either a bearish or bullish view is warranted.