There's an Ominous Cloud Hanging Over Facebook's Stock Chart

A dark cloud cover candle formed on the Facebook (FB) chart on Wednesday, an ominous sign at a level that saw a previous bearish candle indication that preceded a 15% drop in the stock price.

At the beginning of February an eveningstar reversal pattern formed below resistance in the $117 area. This three-day formation consists of a large white candle, followed by a narrow opening and closing range "doji" candle, and completed by a large dark candle. It represents a transition from bullishness to bearishness and is considered a reliable reversal indication. The formation of the eveningsatar was followed by a sharp 15% drop in the stock that took it below its 50-day moving average. It was able to quickly recapture the average and begin making a series of higher highs and higher lows, taking it back up to the location of the eveningstar high.

 The dark cloud cover candle formed at this previous level of resistance. The definition of a dark cloud cover candle is one that follows a bullish long body candle that closes near the high of the session. The cloud candle gaps higher on the open and then closes in the lower half of the previous up candle. The appearance of this candle at former resistance reinforces the bearish significance of the candle. The relative strength index and the money flow index, a volume-weighted relative strength measure, have both touched the lower end of their overbought zones, reflecting extended price and money flow readings.

If this candle does initiate a pullback in the stock, the uptrend line drawn off the February and March lows and horizontal resistance at the $110 level should offer initial support, but if history rhymes, a decline could be more significant.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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