Momentum Implies That FB Stock Stock Is Currently Geared Toward Higher Prices
Thankfully, the first quarter of 2018 is behind us, because it is a quarter that I believe most investors would rather not repeat.
The first quarter was when volatility had made an unwelcome return and, with it, came wild market swings. Wild swings have a tendency to play on people’s emotions, which has rarely ever been the basis of any good decision-making.
As a matter of fact, some of the worst investment decisions have been made under such conditions, so it shouldn’t be too shocking to find out that markets characterized by elevated levels of volatility have a tendency to depreciate.
Look no further than the first quarter as a testament to this notion.
Facebook, Inc. (NASDAQ:FB) stock is a good example of what can happen to a stock when the markets are characterized by elevated levels of volatility. On February 1, Facebook stock hit a high of $195.43. Eight weeks later, it was trading as low as $149.02, representing a shockingly large loss of 23.8% in a short amount of time.
Luckily, the volatility that was responsible for this weakness has begun to subside, and FB stock has begun to appreciate again.
The range I pointed out was not as arbitrary as it seems. In fact, these highs and lows have defined a technical price pattern that has captured the bullish trend in FB stock.
This technical price pattern is highlighted on the following Facebook stock chart.
Chart courtesy of StockCharts.com
This FB stock chart highlights a technical price pattern known as an ascending channel.
An ascending channel is characterized by price action that contains a series of higher highs and higher lows, which is the quintessential characteristic of a bullish trend.
Defining this pattern was accomplished by connecting the respective levels of higher highs and higher lows. This created two upward-sloping trend lines that identify where price support and price resistance resides.
The sell-off in Facebook stock concluded as soon as the trend line identifying price support was tested. Since that date, higher prices have prevailed.
I can only assume that, as long as the FB stock price continues to trade within this pattern, its bullish trend is still in development and higher stock prices will prevail over time.
The influential indicator highlighted on the following Facebook stock chart is reinforcing the notion that this bullish trend is set to continue and that resistance outlined by the ascending channel is likely to be tested in the not-too-distant future.
Chart courtesy of StockCharts.com
The influential momentum indicator highlighted on this FB stock chart is the moving average convergence/divergence (MACD) indicator.
MACD is a simple yet influential indicator that is used to determine whether bullish or bearish momentum is influencing the price action in a stock, using the crossing of a signal line.
Bullish momentum implies that a stock is geared toward higher prices, while a bearish MACD cross implies that a stock is geared toward lower prices. I use this indicator quite often because a stock cannot stage a sustained move toward higher or lower prices unless the applicable momentum is supporting it.
For example, in January 2017, a bullish MACD signal implied that FB stock was geared toward higher prices. Right after it was generated, the Facebook stock price staged an impressive advance toward higher prices.
In September 2017, a bearish MACD signal was generated, implying that the stock price was geared toward lower prices.
The move toward lower prices didn’t manifest until late January, when elevated levels of volatility were affecting the trading action in the markets.
Since support outlined by the ascending channel was tested in March, higher Facebook stock prices have prevailed. This move toward higher prices is currently being reinforced by a bullish MACD signal, which was just generated in the second week of May.
This bullish signal is suggesting that further gains are likely, significantly increasing the odds that resistance outlined by the ascending channel is likely to be tested, implying that new all-time highs are on the horizon.
In March, Facebook stock bottomed on a significant level of price support, and it began its ascent toward higher FB stock prices. This ascent is now being supported by an influential momentum indicator suggesting that further gains are on the horizon.