As we wait for the stock market to open this morning, a lot of today’s focus will be on the testimony (from several people) in Washington DC. The one that we’ll be focused (at least for the markets) will be the testimony of FaceBook COO Sheryl Sandberg. She is a very smart and polished executive, so there is every reason to think that she will come across quite well in her testimony………This will be important…because the stock of FaceBook (FB) stands at a VERY important technical juncture.
We all know about the more than 20%+ decline FB saw back in July after they reported their earnings. Yes, it did bounce 7% off those lows, but since it only retraced 1/3 of its decline, the bounce was not as impressive as some tried to portray. More importantly, the stock has since rolled over…and yesterday’s poor action (after a downgrade by Moffett) took it down to its “reaction lows” from July…….In other words, the stock has seen a key “lower-high” (which was a MUCH lower-high)…and if this is followed by a key “lower-low” below those July lows, it’s going to be quite negative on a technical basis. (Chart attached below.)
We’d also note that a break below the July lows will be particularly concerning because experience tells us that whenever a stock falls 20% or more over just 1-3 days, it usually involves some “forced selling” (margin calls, etc). These kinds of severe declines over just a few days usually leads the stock to get “washed out”. This, in turn, usually signals a bottom for the stock that lasts for a long time (6 months or more).
However, sometimes a stock will not see a multi-month bounce. Sometimes it rolls back over and takes out those panic lows rather quickly. When that happens, that tends to tell investors that another shoe is going to drop…and both momentum AND fundamental investors get very nervous. This frequently leads them to throw in the towel and sell….and look for much lower levels to move back into the stock.
This is why we believe that the July lows ($170-$171) is a VERY important level for FB…and any “meaningful” break below those July lows (a small break will not be enough) could/should lead to another significant leg lower in the stock. (2nd chart below.)
As always, we HAVE to wait to see if the stock breaks this level or not before we send a red warning flag up the flag pole!!!! If FB can hold this important support level, the stock will be fine!!!…and Ms. Sandberg is the perfect person to defend the stock at this key juncture. However, if FB breaks below that level (either now…or after any initial pop after her testimony), it will indeed raise a red flag in our minds. Therefore, the action in FB over the next week or two is going to be very, very, very important. (Click the link below to see our comments from a CNBC interview on this subject.)