Facebook Inc: This Is Why the Bears Are in Control of FB Stock

fb stockFB Stock: Looking for Support

Facebook Inc (NASDAQ:FB) just reported earnings and it beat expectations on both the top and bottom lines. Earnings came in at $1.09 per share compared to an expected $0.97 per share, and revenue came in at $7.01 billion versus an expected $6.92 billion. Under calmer market conditions, such earnings would have been praised by investors. Now, however, FB stock is set to trade lower as a result.

The market indices have been trading sideways for a couple of months now, but within this sideways action, the internals were deteriorating. I measure these internals using market breadth, and new highs versus new lows. Market breadth has been been negative as declining stocks continue to outpace gaining stocks. The number of stocks making new 60-day momentum lows is far greater than those making 60-day momentum highs by a large margin.

It is difficult for stocks to make headway under such conditions and as a result, the path of least resistance is lower. The negative market sentiment is stemming from a looming fed interest rate hike and political uncertainty with regards to the presidential election. Regardless of the catalyst, it is time to batten down the hatches and find out where support lies.

The following Facebook stock chart illustrates the price action that preceded the the earnings announcement.


Chart courtesy of StockCharts.com

For the last 14 months, the price action on the Facebook stock chart is defined as a rising wedge. A rising wedge is a technical pattern that contains two converging trend lines, in which both trend lines slope upwards. These two trend lines act as support and resistance, while the price oscillates between them. The pattern is complete when the price breaks out of this pattern. On average, these patterns break downward and result in a bearish objective.

Facebook stock is expected to trade lower when the market opens and this pattern is set to break lower. This would mean that the bears are now fully in control of Facebook stock.

The first area of support is found using the 200-day moving average. 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 acted as support since FB stock first started trading above it in July 2013. FB stock only began trading below this moving average in short stints that began in August 2015, as selling pressure from general market turmoil caused this level to be breached. A sustained close below this level on a weekly basis would be cause for serious concern, as this would indicate a change in behavior for FB stock.

The following Facebook stock chart illustrates the longer term view of support.


Chart courtesy of StockCharts.com

The price chart of FB stock above illustrates that trading in this vehicle has been defined by an ascending channel. An ascending channel  is created 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 in dramatic fashion when it did.

A sustained close below the 200-day moving average would put the support, defined by the lower trend line, as the next logical target. Failing to hold this level could mean that a secular bear market in FB stock, and equities in general, has begun.

Bottom Line on Facebook Inc Stock

Market indices are under pressure and weakness in the share price is widespread. I am bearish on Facebook stock as it has broken down through a rising wedge. I would be looking for support to hold and market conditions to improve before I change my view of FB stock.