The Decision Support Engine is on alert for a peak and reversal of the rally that began at least at the May 12 low near $77 if not the April 2014 low near $45. Early in Wednesday's session, shares were up 70 cents, or 0.8%.
History shows there are certain mathematical and statistical principles that can be applied to stock prices with higher-than-normal probability-ranked outcomes. One of these is that when a stock trades above or below its 200-day moving average, or DMA, by more than three standard deviations. The percentage of normality that is contained within three standard deviations is 99.7%.
The chart below shows how the DSE integrates standard deviations into its composite formula, which is represented vertically, rather than horizontally. As the chart shows, above 87.33 represents Facebook being priced by the crowd beyond the three-standard-deviation band that is calculated above and below the 200 DMA. In addition, it shows the two-standard-deviation bands, as well as the Bollinger Bands (shorter-term calculations of standard deviation extremes). Yellow boxes highlight each time in the past seven months that the price of Facebook was in the vicinity of the two-standard-deviation band, as well as when the stochastic study, in the lower pane of the graph, was in the vicinity of the 90% level.
As you can see, from a completely objective perspective, when these two conditions were met, holding a long position in the stock quickly became suboptimal, leading to declines of approximately 10%, 9%, and 11% in the eight weeks that followed. Certainly, there is no way to know for sure whether another decline of similar magnitude will happen. Tuesday's thrust went to a deviation extreme that should not be ignored -- three standard deviations, rather than only two.