When the market is bad and nervous investors unload holdings, even good stocks suffer.
By rights, Facebook (NASDAQ:FB) should not be sold off. Analysts argue the social media giant’s inherent value justifies the price. It isn’t exposed to China or the effect of the coronavirus and even when the economy slows, businesses must still advertise.
And if that’s not enough, the company is sitting on piles of cash for a rainy day — which many would suggest has now arrived.
So why has the stock been underperforming the S&P 500? We could speculate as to the fundamentals, but in this segment we focus on the chart, with the knowledge that the market is nothing more than a glorious voting machine.
Whatever the reason, justified or not, when a freely traded asset enters a trend, it takes on a life of its own, gripping hold of momentum and sentiment. Even smart money can get pulled in.
The tech giant’s price fell below its Jan. 31 low of $201.06, forming a second trough in descent. Before that, the Feb. 18, $217.97 peak was lower than the preceding bottom $224.20 registered on Jan. 29. In other words, we have two descending peaks and troughs, forming a downtrend.
However, conservative analysts would argue that the first peak and trough should not be included in the downtrend, as they were part of the uptrend, demanding an additional peak and trough. Of course, that would cement the downtrend, but while accepting a measure of risk, the movements thus far would generally be enough to be considered a downtrend.
The $194 level stands out as an important support, both as the Sept. 20 high and the December low, which, not incidentally, is where the 200 DMA is. The RSI and MACD are already bearish. As well, it's worth noting that the price also found support at the uptrend line since the December 2018 bottom, when the market was convinced it was turning bearish.
Trading Strategies
Conservative traders would wait for an additional peak and trough before risking a short, and would not commit to a long till a new peak, higher than the Jan. 29 one dispeled any notion of a downtrend.
Moderate traders may enter a long position if the price closes above the uptrend line.
Aggressive traders would buy the dip – entering a contrarian position, counting on the support of the uptrend line and that of the $194 level — providing they understand the risk and are prepared to accept a loss.
Trade Sample