Facebook Inc: These Indicators Say There’s More Upside for FB Stock

Facebook IncFB Stock: The Trend Is Your Friend

Facebook Inc (NASDAQ:FB) stock may be on the trend upward now, but it hasn’t always been a stellar-performing investment…

In 2012, Facebook shares first went public. The demand from retail investors overwhelmed the exchanges and caused a fiasco. Investors’ first taste of FB stock left a foul aftertaste. The returns that followed were subpar to say the least. If you managed to purchase shares on the day Facebook went public, you likely experienced a paper loss of 61% from peak to trough.

The pain associated with a losing trade could have been avoided if investors used a systematic approach to investing. I employ a system that requires multiple signals to confirm a trend. The system is not foolproof, but it is objective. If you had been fortunate enough to follow these signals when Facebook went public, you would have experienced a paper profit of 220% and still be long FB stock.

Yes, I realize that hindsight is 20/20, but it allows us as investors to learn from our past trading experiences in the hope of producing an effective investing strategy for the future.

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The following chart illustrates the signals that first confirmed the bull market in FB stock:

Facebook Inc NASDAQ Chart

Chart courtesy of www.StockCharts.com

Shortly after the initial public offering (IPO), FB stock shares tried valiantly to trade higher. As shares got rejected at the $32.50 price point in June 2012 and January 2013, $32.50 proved to be a formidable resistance level.

Finally, on July 25, 2013, FB stock broke through that resistance level when the share price gapped above. The gap that appears on the chart above is known as a breakaway gap. Breakaway gaps signal that a new trend has started. They also have a great quality of rarely getting filled.

On August 7, 2013, FB stock generated a golden cross. A golden cross is a bullish signal that is produced when a faster moving average—in this case, the 50-day moving average—crosses above a slower moving average—the 200-day moving average here. Traders use this signal to confirm a bull market is on the horizon.

Together, the breakaway gap above the resistance level and the golden cross on the chart confirmed that a new bull market was born.

The following chart illustrates the performance of FB stock after the signals were generated:

Facebook Inc NASDAQ INDX

Chart courtesy of www.StockCharts.com

It has been nearly three years since the golden cross was generated. Shares of FB stock have performed extremely well over that time.

Looking at the chart, Facebook stock’s share price has moved from the lower left to the upper right in a very orderly fashion. Price appreciation has been mostly confined to a trend channel. Any deviations from the channel have seen shares swiftly correct back into the channel. The share price continues to push higher and new all-time highs are the order of the day. All-time highs in share price are significant, as they suggest no overhead resistance to the share price.

As long as the golden cross remains embedded on a bullish signal, share prices are expected to move to the upside. Higher prices are the path of least resistance.

The Bottom Line on FB Stock

FB stock is without a doubt a perfect example of using technical signals to buy a stock and remain long until those signals reverse. It has been three years since the technical indicators I employ signaled a new bull market for FB stock. As long as those indicators remain bullish, I see no reason why the current trend cannot continue. If the indicators or pattern suggests a reversal, I, too, will reverse my opinion.