FB Stock: Buyback Isn’t Enough
After trading closed on November 18, 2016, Facebook Inc (NASDAQ:FB) announced that it was planning on buying back $6.0 billion worth of FB stock from investors. This program will go into effect in the first quarter of 2017. Investors cheered this news by sending Facebook stock up 0.84% in after-hours trade.
Even though this bullish event sent FB stock higher, I still believe the overall bearish trend will overwhelm the bullish tailwind that this news has created.
In my previous report on Facebook, I outlined the reason why I am bearish, and the price has continued to support my views. If my current bearish view still has merit, then the markets will dismiss this buyback news and FB stock will quickly resume its trend towards lower prices.
The following Facebook stock chart illustrates the pattern that first initiated my bearish view.
Chart courtesy of StockCharts.com
FB stock has been putting in a bearish price pattern that began when shares sold off in August 2015. August 2015 was highlighted with a huge sell-off in the Chinese stock markets that some media outlets describes as a crash. The selling pressure from this event spilled over into global markets.
This selling was the beginning of a rising wedge that took a little over a year to complete. 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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The rising wedge was finally complete after the earnings announcement in November failed to enthuse the investing community and they responded by selling Facebook stock. A completed rising wedge implies that price will retreat to the lowest point from which the rising wedge began to develop. If I use this premise, FB stock is setting up to retest the August 2015 lows at $72.00.
The selling off has continued and FB stock is currently trading below its 200-day moving average. The 200-day moving average is the dividing line between stocks trading in a bull market versus 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. FB stock has traded below this moving average on occasion, but it has failed to remain below it. A sustained close below this moving average will only add further selling pressure.
The following Facebook stock chart takes a closer look at this bearish price action.
Chart courtesy of StockCharts.com
The FB stock chart above illustrates that the price levels that have acted as bullish support are now acting as levels of price resistance.
Facebook stock effectively backtested the rising wedge by trading back to the trend line from underneath. It is not uncommon for a price to return to a previous level of support and hit it. This price action reaffirms that the pattern is indeed complete, and it it not a surprise that FB stock sold off and made a new low shortly afterwards.
This same price pattern is occurring with the 200-day moving average, and I am expecting the same result. The news regarding the share buyback initially sent shares higher, but FB stock failed to close above the 200-day moving average. If Facebook stock can regain this moving average, it would be a big step for the bulls and it would be something to look out for, but I am not that optimistic.
Bottom Line on FB Stock
Facebook stock has completed a bearish price pattern and is trading below the 200-day moving average, and I do not believe that the news surrounding the stock buyback will change the current bearish trend in FB stock.