Facebook Stock Nears Historic Breakout

Facebook, Inc. (FB) stock completed a round trip into the July 2018 high near $220 in January, filling the 42-point sell gap printed in reaction to the Cambridge Analytica privacy scandal. It reversed after posting an all-time high at $224.20 about three weeks later, dropping through support at the 50-day exponential moving average (EMA) at month end. The stock has now remounted that level while accumulation readings have reached 2020 highs, setting the stage for a historic breakout that opens the door to $300.

The social media giant reported in-line fourth quarter 2019 revenues in late January and missed profit estimates, while monthly active users surged 8% to 2.5 billion. The stock sold off 7.5% after the bearish news but bounced strongly in reaction to a vigorous defense from influential Wall Street analysts, as well as data showing that a number of large hedge funds opened new positions or increased existing ones in the fourth quarter.

Even so, Facebook faces unrelenting pressure from U.S. and international antitrust and privacy investigations that are targeting the company's controversial advertising and censorship policies. In addition, Facebook is likely to attract intense criticism from both sides of the aisle during the 2020 election cycle after refusing to fact-check targeted political ads. It's widely believed that Russian operatives used Facebook's platform in 2016 to influence the election outcome.  

FB Long-Term Chart (2012 – 2020)

A poorly received 2012 initial public offering (IPO) opened in the mid-$40s and dropped like a rock, posting an all-time low at $17.55 a few months later. A bounce into the third quarter of 2013 completed a 100% retracement into the prior high, generating a high-volume breakout that attracted widespread buying interest. The uptrend entered a rising channel pattern in January 2014, signaling growing sponsorship from funds and institutions.

Price action held within the channel into a September 2018 breakdown that relinquished 95 points in just five months, finally coming to rest at a two-year low in December. The 2019 recovery stalled in July within the massive sell gap, finally completing the round trip and gap fill on Jan.10. The subsequent breakout failed less than one week later, trapping trend followers in a 24-point two-day downdraft. Meanwhile, the stock has been testing the underside of the channel for the past 11 months.

The monthly stochastic oscillator entered a long-term buy cycle from an extremely oversold level in January 2019 and crossed into the overbought zone in April. June's bearish crossover generated a sell signal that persisted into a November turnaround that highlighted unusual relative strength. The indicator has been ticking higher since that time but still hasn't reached the overbought zone, indicating that bulls remain in full control of the ticker tape.

FB Short-Term Chart (2017 – 2020)

The on-balance volume (OBV) accumulation-distribution indicator posted a new high with price July 2018 and entered a brutal distribution phase that ended at a 16-month low in November. Buying pressure into January 2020 stalled below the prior high, establishing a bearish divergence that presaged the failed breakout. OBV has now remounted the January high, setting its sights on the 2018 resistance once again. This bodes well for a historic breakout in coming weeks.

The unfilled Jan. 30 gap between $206 and $223 marks a final obstacle ahead of a breakout, raising the odds that the short-term advance will face several setbacks before reaching a new high. For that reason, sidelined investors may wish to keep their powder dry for now, waiting for another pullback to the 50-day EMA or a final rally thrust that reaches $225. In either case, Facebook looks destined to regain its leadership status in coming weeks.

The Bottom Line

Facebook stock is shaking off major resistance at the 2018 high and could break out soon, setting the stage for an uptrend that targets the $300 level.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.