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A Major Buy Signal Is Brewing On Facebook
The stage is set for a violent rally after losing 25% of market cap.
Facebook recently lost nearly 25% market cap after dismal earnings last week. The iOS14 update in July really hurt Facebook advertisers, who flocked to Google (no surprise Google’s stock was up nearly 20% on earnings).
When prices dramatically fall or rise, I always take note. The buy signal brewing right now with Facebook is a Murphy’s Law opportunity (Pillar 3 of the Stock Market Academy).
Here is a weekly chart as of today. Notice how far price is below the 20-week moving average, minus 2 standard deviations.
The last time price deviated this far from the mean was in March of 2020, which provided an amazing “buy” signal on every stock. Here again we have the same exact scenario. Remember, history is not a predictor of the future, but when price deviates this far from the average, it’s bound to revert.
Let’s break this down a little more. Here is a weekly chart, zoomed in, without Bollinger. This shows the high, the low, the open and the close of last week’s sell off.
Now notice the price action for this week.
Pillar #3 is Murphy’s Law, which says what goes up must come down. Murphy’s Law manifests itself when price is outside of Bollinger Bands (i.e. price extremes). Like anything else in the natural order of affairs, things revert to their historical mean.
We can confirm Pillar #3 is likely to happen with Pillar #4, a marked reversal in price. Strong reversals in price signal a real shift in power between bulls and bears… and manifests itself in Japanese Candlesticks. This signal in particular is the “hammer”.
The Psychology of Japanese Candlestick Hammers
There is a very powerful psychological effect at play here. Notice price plummeted last week on the earnings announcement. And this week, the downfall continued, only to have reversed midweek. Here is why this is significant:
Traders last Friday saw the horrible news announcement, and levied more shorts. The selling continued, as investors also dumped the stock. What else would the decline be from? We can only assume this is what’s happening, because price went down. Fair enough, right?
Now imagine you are a short seller or investor who just dumped the stock, only to watch it reverse right before your eyes. That will immediately make you second guess the position.
Short traders, in order to exit their position, have to buy.
Hammer Candlesticks Signal Violent Rallies
When a hammer forms, traders see the signal. And they act on it. Short traders think, “oh man, I have to cover my position”. Long traders know short traders are running this logic in their head, which entices them to buy. Short sellers know long traders are seeing the same candlestick, forcing them to cover. And investors see the “dip”. This amalgamation of psychology often results in one thing: a violent rally.
Here is the chart of the S&P 500 from January 24th, 2022… the same exact signal that is brewing on Facebook.
Compare this pattern with the Facebook weekly chart (remember, the longer the timeframe, the more powerful the signal):
Setting Expectations for a FB Reversal
First, it’s important to note that price must hold at this level for the signal to be valid. Personally I like the opportunity here even if price goes down, because it’s so far deviated from the mean. If you’re aggressive, you can buy now. But if you’re conservative, you should wait until 3:50pm on Friday for the weekly candle to “form”. That is exactly why I say the signal is brewing. A lot can change between now and tomorrow afternoon.
Confirming a Reversal on FB
If you look at the daily chart, you’ll notice a wide expansion of the Bollinger Bands during last week’s sell off.
This happens when there is a rapid move, because the way the Bands are calculated is standard deviation, high or low. So if the price deviates dramatically from the historical average, the standard deviations get larger on an absolute basis. Without getting into a deep statistical analysis, what’s important here is that the upper band is curling over. In his book, Bollinger on Bollinger Bands by John Bollinger, Bollinger says this confirms a move is “over”.
Summary on a Potential Facebook Reversal
Price has to hold above $230 for the signal to remain valid. If Facebook closes at around this price by the end of the week, it is not unreasonable to see a violent rally off the lows this week.
Disclaimer on Trade Opportunities
Never forget… anything can happen. This is not a hard stock recommendation. I’m simply pointing out that the stage is set for a violent rally in Facebook. Of course, the Fed could come out with one announcement that changes everything for everyone. Which is why you have to manage your risk, and only trade/invest in something because you believe in it. Don’t listen to me and buy Facebook just because of this post… just leverage my knowledge and insights for whatever purpose you want.
Happy Trading 😊