FB Stock: Sitting Bearish
I have had some concerns with the price action in Facebook Inc (NASDAQ:FB) stock. These concerns have manifested from a bearish price pattern that has developed on the Facebook stock chart.
I base my investment views and trading strategies on the signals and patterns that are generated from the price chart. Using past price and volume data to discern trends and project future prices is known as technical analysis, and this is the body of knowledge I use to assess and analyze potential interments.
I have learned in my time that once a signal or pattern has been generated, it is best to pay heed.
The following Facebook stock chart illustrates the pattern that suggested that bearish headwinds have begun to swirl.
Chart courtesy of StockCharts.com
FB stock began putting in a bearish price pattern in August 2015, after a sharp price decline that was triggered by a market sell-off that began in Asia after the Chinese stock market experienced what the media outlets described as a market crash.
This selling initiated the bearish pattern that traders refer to as a bearish rising wedge. This 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 the price manages to break out of this pattern. On average, these patterns break downward because such a trend is difficult to maintain, as it requires a sustained amount of buying pressure.
The breakdown of this pattern finally occurred after an earnings announcement in November failed to enthuse the investing community, and they responded by selling Facebook stock.
A completed rising wedge implies that the 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 following Facebook stock chart illustrates the developments that have followed the breakdown of the rising wedge.
Chart courtesy of StockCharts.com
Shortly after FB stock broke below the bearish rising wedge, the price quickly returned to backtest the trend line that served as support. Such price action is not uncommon, and it serves to confirm that the pattern has indeed been broken, and I describe this action as one last kiss goodbye before the new trend reasserts itself.
Facebook stock proceeded to sell off, and has been whipping on either side of the 200-day simple moving average (SMA). 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.
The 50-day moving average is beginning to slope downward, and both moving averages are beginning to converge. This action raises the danger that a death cross could be generated. A death cross is a bearish signal that is produced when a faster 50-day moving average (highlighted in blue) crosses below a slower 200-day moving average (highlighted in red).
This signal is used to confirm that a bear market is on the horizon, because it indicates that bearish momentum has now overwhelmed any bullish momentum and the bears have once again seized control of FB stock.
In order to avoid such a circumstance, FB stock needs to start rising in price, and the first step would be to close above the 200-day moving average and then close above the 50-day moving average. A break below $114.00 would suggest lower prices, and would increase the probability that a death cross would be generated.
The bearish outcome would reinforce a test of $72.00 outlined as a price objective of the bearish rising wedge.
Bottom Line on Facebook Stock
Facebook stock has done little in terms of price action to alleviate my concerns that a bearish trend is developing. FB stock needs to rise or else bearish signals will continue to mount and the bearish headwinds created from these signals will add further pressure to the price of Facebook stock.