MorningWord 11/27/13: $FB Poked Bear Market Territory

by Dan November 27, 2013 9:04 am • Commentary

MorningWord 11/27/13:  While the major equity indices all hovered above nice round numbers yesterday (SPX 1800, Nasdaq 4000 and Dow 16,000), one of the largest Tech stocks in the market quietly went into and quickly shot back out of Bear Market territory.  At its lows yesterday, Facebook was down a tad more than 20% from the all time high made on Oct 18th.

FB 30 day chart from Bloomberg
FB 30 day chart from Bloomberg

Back on Nov 8th in our Chart of the Day (Heads Rolled This Week – $FB vs $TSLA), we made the case that FB’s technical set up was looking a heck of a lot like that of TSLA just before it, making what looked very much like a head and shoulders top.

Facebook from Nov 8th when the stock was $47.85

FB 6 month chart from Bloomberg

At the time I was trying to demonstrate the technical similarities to another much loved cult stock in 2013, TSLA.  Here is the chart of TSLA from Nov 8th 2013:

TSLA 6 month chart from Bloomberg

Now we all know what has happened to TSLA, the stock is down another 10% from those levels,and has absolutely no bounce and the stock now sits 38% below the all time highs made on Sept 30th.

Taking a look at FB as of yesterday’s close, it is fairly apparent that yesterday’s price action had the potential to be a sort of make or break for the stock in the near term.  The stock broke below the $45 neckline Monday, closed below, and made a new low yesterday, before reversing.

FB ytd from Bloomberg
FB ytd from Bloomberg

For FB bulls who think yesterday’s reversal gets them off the hot seat, I would suggest that the next week or so will be fairly crucial.  The momentum appears to be broken in the stock since the TWTR IPO, and it’s not just in FB.  Other Web 2.0 stocks like LNKD, YELP & Z have had a tough time of late as the markets make new multi-year and 52 week highs.

As FB’s 50 day moving average flattens out, the $48-$49 area will be crucial to watch.  There is ample overhead supply, and many likely sellers on each bounce.  Going back to the TSLA example, the stock actually made slight breaks of its neckline a couple times and rallied before the final breakdown that sent the stock plunging.  Even though FB was able to bounce after its initial break of $45, that might have just been the first chink at support.

Momentum stocks act best when the 50 day moving average is rising, and the stocks are making higher highs and higher lows.  When that trend changes, the going gets tough, and often in a hurry. FB is fighting to maintain support, but the stock’s best case scenario here is likely flat consolidation, with risks of a larger breakdown on the rise.