Facebook Stock’s 3-Year Breakout Predicts Higher Prices

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Facebook Stock’s 3-Year Breakout Predicts Higher Prices

By Alan Farley | July 27, 2017 — 10:10 AM EDT

Shares of Facebook, Inc. (FB) rallied more than 11 points ahead of Thursday’s opening bell after beating second quarter earnings and revenue estimates. More importantly, overall quarterly revenue rose an astounding 44.8% year over year, while ad revenue grew 47%. The company expects growth to decelerate in the coming quarter, but lower capital expenditure guidance should ease that shortfall, underpinning bottom-line results.

The stock pushed against three-year channelresistance for three months heading into this week’s report and surged higher following the news, clearing that significant barrier in a show of strength that should open the door to prices of $200 and beyond in the coming months. This breakout should also increase the four-year uptrend’s rally trajectory – a remarkable achievement for a maturing technology company – while establishing new support above $150. (See also: Facebook’s Q2 Earnings and Revenues Surpass Estimates.)

FB Weekly Chart (2012 – 2017)

The company came public in May 2012 in the mid-$30s, making headlines in a controversial offering that peaked on the first trading day, ahead of a two-legged decline that dropped the stock to an all-time low at $17.55 in September. It built a four-month base with resistance at $25 and broke out in December, entering an uptrend that stalled below the post-IPO high in February 2013. A higher low into June set the stage for a buying wave that finally reached that resistance level three months later. (For more, see: If You Had Invested Right After Facebook’s IPO.)

The stock broke out quickly, entering a high-volume uptrend that topped out in the lower $70s in the first quarter of 2014. Price action then eased into a broad rising channel that remained in force until this week’s powerful breakout. The majority of pullbacks held support at the 50-week exponential moving average during the channel’s dominance, while at least 10 attempts to break the upper trendline​ failed to generate rally momentum until this week’s euphoric buying event.

The weekly stochastics oscillator has carved a highly bullish pattern since entering a buying cycle in November 2016. It is typical for these cyclical upswings to last eight to 12 weeks and flip over, but the stock shook off multiple sell signals between February and May, allowing the indicator to turn higher in July and zoom back to the overbought level. It could now hold at this extreme level for a number of additional weeks while the breakout gathers strength. (To learn more, check out: Stochastics: An Accurate Buy and Sell Indicator.)

FB Daily Chart (2015 – 2017)

The August 2015 mini flash crash signaled the start of a tough period characterized by higher-than-average volatility, expanding traditionally narrow ranges while the stock carved a rising wedge within the channel. It tested channel and wedge resistance seven times into October 2016 and sold off in a decline that attracted a number of bearish topping calls. Channel support held through three tests between November 2016 and January 2017, completing a triple bottom reversal ahead of a strong recovery wave into May 2017.

More than two months of narrow sideways action at resistance signaled resilience ahead of this week’s highly bullish event. The breakout establishes new support at the top of the range between $152 and $155, with pullbacks into that price zone now offering low-risk buying opportunities. Traders should look for volume to match growing enthusiasm in coming weeks, with already positioned institutional players adding exposure while the relatively small supply of sidelined players finally takes the plunge. (See also: Facebook Short Interest Is at a Record Low.)

The Bottom Line

Facebook reported an outstanding quarter that signals continued rapid growth and social media dominance. Improved operating margins and escalating mobile ad revenues ensure the stock’s Nasdaq-100​ leadership role, perhaps well into the next decade. In addition, the stock has now broken out above three-year channel resistance, establishing a solid support level above $150 that should offer a platform for substantially higher prices into 2018. (For additional reading, check out: Why This Is the Best Year for Tech Stocks Since 2008.)

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

Published at Thu, 27 Jul 2017 14:10:00 +0000

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