Facebook chart headwinds rise

As Facebook shares face further flak on data use, bearish chart patterns are coming to a head

Facebook chart headwinds rise

Widening pattern

As Facebook shares face further flak on data use this week, one of their most compelling long-term chart patterns is an ascending, broadening wedge, as shown in Figure 1. It is generally a reversal pattern. Completion is marked by a sustained break out. Once both channel lines are present, price must touch each in zag-zag fashion at least three times, starting from one line (point A) then the other (point B) before heading to back the first (point C). In case of consecutive touches, we count the one immediately preceding a move to the other line.

Major decline possible

Since FB has touched the channel lines 5 distinct times, we can assume price will break the pattern next time it reaches a trend line, or soon after. Typically, the post-completion target price is generated from the entire length from low to high. In this case, that equates to a rise from $72 in the third quarter of 2015, to $195.32 earlier this year, in theory, suggesting a punishing 171.28% long-term move. One moderating factor was resistance near the prior record high of $195. Therefore, despite a recent up leg, reversal was beginning before the upper line was hit. Also note divergence between Relative Strength Index and price; another bearish signal.

Breakdown

Shorter intervals offer more information. Figure 2. reveals a steep uptrend from 23rd April. However, together with resistance from January’s record high, the short-term line creates a rising triangle. A break out – which had potentially begun on Thursday – typically creates increased momentum and volatility. We also note the RSI declines. In conjunction with long-term factors, a break down in the short-term pattern should presage a move to the lower long-term trend line. A subsequent break of that would increase probability of a pronounced decline.

Confirm

The best confirmation of the beginning of a lengthy move would be a break above or below the rising triangle in the daily chart. Remember, a (‘false’) break higher could still precede a sharp pullback, after which price tumbles. The opposite could also apply. Therefore, confirmation that a genuine move has begun should be sought. For instance, a session close lower than the prior session low, with good follow-through, would constitute confirmation. Vice versa could disprove the case for a reliable break.

Figure 1 - Facebook Inc. price chart - weekly intervals


Source: Thomson Reuters and City Index


Figure 2 - Facebook Inc. price chart -daily intervals

Source: Thomson Reuters and City Index


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