How to Trade Facebook After Wedbush Cuts From Best-Ideas List

Buy Facebook on weakness to its 200-week SMA at $164.92 and reduce holdings on strength to its monthly and quarterly risky levels at $181.39 and $188.32, respectively.
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Facebook  (FB) - Get Report on Thursday was cut from the Wedbush best-ideas list, which didn't move the stock much. 

But the shares are below their monthly risky level at $181.39, which was nearly tested on April 14. And therein lies a column for investors in the social-media icon.

Facebook's removal from the list was caused by a slump in advertising revenue stemming from covid-19. Here’s the full story as posted on TheStreet.com.

The stock set its all-time intraday high of $224.20 on Jan. 29, then traded as low as $137.10 on March 18. This put the stock deep into bear-market territory, 38% below the high.

Facebook beat earnings-per-share estimates in the past two quarters but missed in the prior two quarters. 

Earnings do not matter that much when the world is worried above the spreading of covid-19.

The stock is not cheap. Its price-to-earnings multiple is 27.7 and the company does not pay a dividend, according to Macrotrends.

The Daily Chart for Facebook

The Daily Chart for Facebook

The Daily Chart for Facebook

Courtesy of Refinitiv XENITH

The daily chart for Facebook shows that the stock had been above a golden cross, which was confirmed on April 3, 2019. That's when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher prices would follow. 

The stock slipped to a test of its 200-day SMA at $161.33 on June 3, 2019, as a buying opportunity. 

The 200-day SMA was tested again at $175.30 on Oct. 2 as another buying opportunity.

The golden cross ended with a death cross on March 27, when the 50-day SMA fell below the 200-day SMA. This signal indicates investors should sell strength to the 200-day SMA.

When the stock set its all-time high of $224.20, on Jan. 29 the stock was below its semiannual pivot at $225.49. 

This high was on a positive reaction to earnings released that day. The next day the reaction was the opposite as shown with a price gap lower on Jan. 30.

The stock cascaded lower on March 3 when it gapped below its 200-day SMA. This led to the quick crash to its March 18 low of $137.10.

The move higher to $181.23 was caused by the power of the monthly risky level at $181.39.

The Weekly Chart for Facebook

The Weekly Chart for Facebook

The Weekly Chart for Facebook

Courtesy of Refinitiv XENITH

The weekly chart for Facebook will be positive if the stock ends the week above its five-week modified moving average of $174.98. 

The stock is above its 200-week simple moving average, or reversion to the mean, at $164.92.

The 12x3x3 weekly slow stochastic reading is projected to rise to 29.34 this week from 26.26 on April 10.

At the high this reading was above 90. This put the stock in an inflating parabolic bubble formation and bubbles always pop.

Trading Strategy: Buy weakness to the 200-week SMA at $164.92 and reduce holdings on strength to the monthly and quarterly risky levels at $181.39 and $188.32, respectively.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.

Second quarter 2020 and monthly levels for April were established based upon the March 31 closes.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.