After a huge long-term bull run, Facebook Inc (NASDAQ: FB)’s chart may finally be breaking down in the short-term. Facebook’s stock is currently testing the support line of a Rising Wedge pattern, a formation typically seen just prior to a reversal of a long-term bullish trend.
An uptrend is defined by a series of higher highs and higher lows. A resistance line (the red line) is placed by connecting the peaks and a support line (the green line) is created by connecting the troughs.
A look at Facebook’s long-term chart shows the anatomy of a typical uptrend channel, where the slopes of the support and resistance lines are roughly equal.
The Rising Wedge in Facebook’s stock can be seen in the chart below. The pattern is typically formed prior to a stock transitioning from a bullish trend to a bearish one.
As a bull run begins to lose its strength, buyers continue to buy the stock at higher troughs, which keeps the slope of the support line consistent. However, buyers begin to show an increasing unwillingness to buy the stock when it hits new short-term peaks. The result is a negative shift in the slope of the resistance line. Instead of a channel, the support and resistance lines begin to form a Rising Wedge.
Rising Wedges often precede a break in the support line which marks a bearish transition for a stock. For Facebook, that would mean a convincing breakdown below $110. For confirmation, traders can watch for high volume and a dip below the stock’s previous short-term low of $106.31 back in April.
The stock bounced twice off of the $106 level on high volume in April, so a breakdown below that level would be very bearish at this point.
In addition to the $106 level, traders should keep a close eye on the stock if it breaks out above $120. This could be a sign that the uptrend has resumed and the Rising Wedge was simply a bear trap.
Below $106, the next major support for the stock is at its February lows in the $90-93 range.
Either way, it’s likely that Facebook’s trading action in the next several days will be critical in determining whether or not its impressive multi-year bull run has finally come to an end.
Disclosure: the author has no position in the stocks mentioned.
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