Shares of social media giant Facebook, Inc. (FB) were solidly in bull market territory on July 25 until after the closing bell, when the company missed earnings estimates. This resulted in a three-day bear market crash of 23.8% from the all-time intraday high of $218.62 set on July 25 to the low of $166.56 set on July 30.
Since the news was just before the end of the first quarter, the adverse effects on first quarter earnings did not hurt the bottom line. The stock set its 2018 low or $149.02 on March 26 and returned to its annual pivot of $162.65 on March 27. This magnet stayed in play as a buying opportunity until April 25, when first quarter earnings beat expectations. The Facebook bulls proclaimed that the stock was not hurt by the data scandal and that Facebook shares were on a new momentum run-up. This put the stock at its all-time intraday high as second quarter earnings were released on July 25.
When I profiled Facebook ahead of earnings, I warned that the stock had become an “inflating parabolic bubble,” which I always view as a technical warning. This signal occurs when the weekly slow stochastic reading moves above 90.00 on a scale of 00.00 to 100.00. Missing second quarter earnings after the close on July 25 was the catalyst that completed the circle from parabolic bubble to bear market in just three days.
This week, shares of Facebook began to decline further on difficult testimony and questioning concerning social media privacy and security before a Senate committee. This morning, the stock slipped closer to my annual value level of $162.65. (For more, see: Facebook, Twitter Face U.S. Congress Over Politics and the Internet.)
The daily chart for Facebook
Courtesy of MetaStock Xenith
Facebook is well below its 50-day and 200-day simple moving averages at $187.43 and $181.46, respectively. The lowest horizontal line is my annual value level of $162.65. The horizontal line just below the 200-day simple moving average is my monthly risky level for September at $180.68. Note the price gaps lower on March 19 and on July 26.
The weekly chart for Facebook
Courtesy of MetaStock Xenith
The weekly chart for Facebook is negative, with the stock below its five-week modified moving average of $178.65. The stock is well above its 200-week simple moving average at $130.13, or the “reversion to the mean,” which has never been tested for shares of Facebook. The 12 x 3 x 3 weekly slow stochastic reading is projected to decline to 22.58 this week, down from 27.90 on Aug. 31.
Given these charts, investors should buy Facebook shares on weakness to my annual value level of $162.65 and reduce holdings on strength to my monthly risky level of $180.68. (For additional reading, check out: Facebook App Loses a Quarter of Americans.)
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