Technical Analysis: Facebook Trades Within a Bearish K-Divergence Range

Technical Overview

  • In January 2018, Facebook’s stock peaked roughly at the same time as the NASDAQ Composite Index. The stock actually did manage to make a new high on February 1, whereas the index had already started gradually moving lower (purple arrows on both the upper and lower charts in Figure 1; upper chart – FB; lower chart – NASDAQ Composite). From February 2 through the February 9 low (bright blue arrows), the stock and the index moved mostly in tandem.
  • By the February 26 minor high (orange arrows), the stock had already started underperforming subtly. It is during the subsequent pullback, and even more pronouncedly, during the next leg-up that it became evident that the stock is severely underperforming. Figure 2 shows a note sent to my institutional clients on March 4, advising them to trim/hedge the stock. Little did I know at the time that this underperformance is likely caused by those market participants who were already aware of the brewing Cambridge Analytica Data Scandal (referred to as the “Data Scandal henceforth). Shortly after, on March 19, the stock plummeted on reports that the company is linked to privacy violations and potential political manipulation (white arrow in upper chart).
  • The stock declined severely over the next eight trading sessions, eventually finding its footing after retesting a key support (green trendline in Figure 3).
  • On April 26, the stock gapped up after reporting a 49% revenue growth in 1Q18 (green arrow in upper chart in Figure 1). Since then, the stock has continued climbing, supported by the strength of the broader markets.
  • Last Thursday (May 10), the stock entered a bearish K-Divergence Range (violet horizontal trendlines in Figure 4). The implication is that market participants are now given a second opportunity to sell the stock at pre-Data-Scandal prices with post Data-Scandal information. After all, who wouldn’t have sold the stock in early March in the $184 – $195 range had they known about the looming Data Scandal. Of course, in this case, such analysis is not perfect as there has also been a stellar earnings report since news about the Data Scandal had surfaced.

Figure 1. FB & NASDAQ Daily Chart

Figure 2. March 4, 2018 – FB Recommendation

Figure 3. FB 2-day Chart

Figure 4. FB Daily Chart

Implications

  • The stock is expected to pull back once bullish momentum from Q1 2018 subsides. One should look for a sell signal within the bearish K-Divergence Range as a confirmation.
  • Minimum downside projection of pullback would be $170. Further down, the stock may potentially close the 1Q18 up-gap.
  • Strong post-earnings moves are often supported by the 8 EMA. A break below it may indicate that the stock is losing steam.

Outlook

  • Neutral with a bearish bias within the bearish K-Divergence Range.
  • Potentially short-term bearish below its 8 EMA.
  • A close above $195.32 should negate the bearish implications.

Disclosure: Small put position initiated today. Likely to add if the stock moves closer to the upper boundary of the range (as the risk-reward of the trade will improve at higher levels – $195.32 stop) or if it forms a topping pattern. In both cases will likely wait for a break below the 8 EMA.

Trade recommendation to be published once a clear sell signal transpires.

Featured image courtesy of Shutterstock.

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http://www.linkedin.com/in/konstantindimov