FB Stock: Trending Higher
My bearish views on Facebook Inc (NASDAQ:FB) stock are proving to be ill-founded, because the price is failing to agree with my views. To add salt to my wound, Facebook stock is increasing as bearish signals have continued to mount.
So, as a result, I have little choice but to stand back from my bearish view and assume a neutral bias on FB stock.
The reason why I cannot assume a bullish bias is that a bearish view might still be warranted. This may sound perplexing and counterintuitive but, if Facebook stock continues to rise at this pace, it will hit a level of resistance that could set up another sell-off. The problem with this notion is that it requires higher prices, and who would want to sit through such an ordeal?
There is a lesson to be learned in such situations; it is better to stand aside from your position and acknowledge that the trend has turned against you. This is where risk management works its magic.
The following pattern on the Facebook stock chart is where I first derived my bearish view.
Chart courtesy of StockCharts.com
The bearish rising wedge that is illustrated on the FB stock chart above is the basis of my bearish view.
This bearish pattern 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 it manages to break out of this pattern. This trend usually breaks downward, and this is because it requires a consistent amount of buying pressure to remain inside this pattern. Any stumble that creates any selling pressure causes the price to exit this pattern in a downward direction.
In November, a Facebook earnings announcement disappointed investors, and this was the catalyst that caused FB stock to exit the pattern in a downward direction. This breakdown is highlighted on the Facebook stock chart above. It was at this point in time that I became bearish on FB stock, because of the bearish consequences it suggested.
A completed bearish rising wedge implies that the price will retreat to the lowest point from which the rising wedge began to develop. Therefore, it implies that FB stock is set to test the August 2015 lows at $72.00.
The following Facebook stock chart illustrates the price action that followed the completed bearish rising wedge.
Chart courtesy of StockCharts.com
After Facebook stock exited the channel to the downside, a sell-off ensued that drove the price lower until FB stock finally found support at $114.00. Over the next month-and-a-half, Facebook stock oscillated within a trading range that ended up creating a consolidation pattern.
This pattern looked as though it could become a continuation pattern. The pattern would have been confirmed when the price exited it in the downward direction. The death cross that was generated early in 2017 supported this notion. A death cross is a bearish signal that is generated when the faster 50-day moving average (highlighted in blue) crosses below the slower 200-day moving average (highlighted in red). This indicator suggested that a bear market had begun, and it supported the notion that further downside, spurred on by the bearish rising wedge, was set to continue.
To my dismay, this did not occur, and this is the point in time when I really began to doubt my bearish view. Facebook stock exited the consolidation pattern in an upward direction, confirming that the consolidation pattern is indeed a trend reversal pattern. This is the point in time that risk management dictates removing any bearish positions that have been applied. In the blink of an eye, Facebook stock has surged higher in price, surpassing the level in price that first suggested a bearish view was warranted.
This does not mean I have become bullish on FB stock. The price action can still manifest itself into something sinister, and that would occur when Facebook stock tests the bearish rising wedge from beneath. In order for this to occur, FB stock will need to rise a substantial amount before a backtest is even possible. Compounding this perplexing view is that the trend line that outlines the bearish rising wedge is upward-sloping. Therefore, the longer that Facebook stock takes to achieve this backtest, the higher the price will be when it finally reaches that level.
Bottom Line on FB Stock
My bearish view on Facebook stock has been refuted at this moment in time, because the trend has turned against me. As a result, I have no choice but to take a neutral stance on FB stock. I will wait for a constructive pattern to develop before I initiate a new trading view.