Is a Facebook Breakout Imminent?: Must-See Chart

NEW YORK (TheStreet) -- Over the long term, fundamentals play the largest role in where a particular stock is headed. Over the short and even intermediate terms, though, technicals can be a significant driver in a stock's price action. 

The power of technical analysis is undeniable. Many traders live and die by their charting skills, sometimes trading minute-to-minute or day-to-day. For investors who use fundamentals to chose their investments, using technicals can help with choosing a proper entry. 

The stock I've been stalking pre-earnings is Facebook (FB). Last quarter, the company reported strong results and traded higher in the after-hours session. However, management mentioned that teens may be beginning to shy away from using the platform. 

As you can imagine, investors immediately dumped the stock and pushed the share price lower. It was a complete overreaction, especially considering everything positive the company had done in the quarter. 

That was in late October. Since bottoming near $45, the stock has rallied higher, but has struggled to get past $58.75. Courtesy of StockCharts.com, check out the chart below:

The stock formed the bullish technical pattern known as an "ascending triangle," highlighted by the two blue trend lines. This is when a stock has support trending higher but resistance at a standstill level. In Facebook's case, resistance is near $58.75, while support continues to follow the stock price higher. 

In my experience, the more times a stock bumps against support or resistance, the more likely it is to break through it. That seems like it could be the case with Facebook too. 

Another formation is known as the "bull pennant," and is visible with the three purple trend lines. While this one is not as neat as the traditional formation, it's still visible nonetheless. A bull pennant begins when a stock jumps higher by a significant manner. 

The big jump in price forms the "flagpole" of the pennant. From there, the price is stuck between two converging trend lines, before eventually breaking out. In a bull pennant, we are looking for the price to break out above the trend line, and then at least hold that level as support. 

In this case, Facebook has successfully broken out of the formation, and has also successfully held it as support. Of course, the stock failed to break through the current resistance near $58.75. 

Between the two, I would view the ascending triangle as a more significant setup in this particular case. 

Finally, the stock is not overbought. This is indicative by the peach-colored circle in the upper-right portion of the chart. The relative strength index (RSI) is a measurement between 1 and 100, where measurements less than 30 are considered oversold and measurements greater than 70 are overbought. Facebook currently has an RSI of 57. 

So that's where we are. Technically, the stock has broken out of a bull pennant, while finding resistance from an ascending triangle. The stock needs a catalyst to get over the hump. 

I mentioned Facebook's previous earnings because of its upcoming report. As long as management doesn't give investors a reason to pause and the company reports better-than-expected results, I think it can push shares higher and through that $58.75 resistance. This will allow the stock to trade in a new range, likely above $60. Because of this and to limit my risk, I am long a small position in call options.

Should earnings disappoint, the stock could fall back to the low $50 range, but I'm optimistic that the Street's expectations are not high enough for Facebook's high growth. Therefore, I'm looking for a run-up into earnings or for a pop higher after the results are released. Considering it reports Wednesday, it seems more likely to be the latter if the thesis plays out.

At the time of publication, the author was long Facebook calls.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

 
-- Written by Bret Kenwell in Petoskey, Mich.

Bret Kenwell currently writes, blogs and also contributes to Robert Weinstein's Weekly Options Newsletter. Focuses on short-to-intermediate-term trading opportunities that can be exposed via options. He prefers to use debit trades on momentum setups and credit trades on support/resistance setups. He also focuses on building long-term wealth by searching for consistent, quality dividend paying companies and long-term growth companies. He considers himself the surfer, not the wave, in relation to the market and himself. He has no allegiance to either the bull side or the bear side.

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