Trend Check with Tushar Chande

The Facebook Face-plant: Which Technical Indicators Offered an Early Warning?

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Facebook dragged down the market as it cracked under head-line risk.  Here I will take a multi-faceted look at the FB charts to see how various technical analysis indicators set up going into the spill, which could inform your trading in the future.  Since different technical indicators measure different aspects of the price action, a composite review is useful to understand the dynamics and speed of response of the various indicators.

 

Chart 1: After trending higher for most of 2017, Facebook has been trading mostly sideways since late-November in a distribution pattern with a couple of short-lived breakouts in January.  The relative performance versus large cap stocks had fallen below 70 (SCTR in the bottom panel), and the Chande Trend Meter had inched above 60 from neutral late last week.


 

Relative and Absolute Performance

Now that we can see the broad picture in Chart 1 (trending up through 2017 and then moving sideways), I will focus on the charts over the past few days.  First, I compared the performance of FB to its mega-cap cousins using the Vanguard MGK ETF (which has about a 4.5% weighting to FB in its portfolio) using the RRG charts.  I could be wrong here, but the daily chart looks favorable even after the sharp drop on the 19th.

 

Chart 2: RRG daily looking back over 14 days shows the FB technical picture improving relative to the $SPX (S&P 500 index).  MGK had also been strong, if weakening marginally.


I wanted to compare the FB performance relative to the $SPX using the Chande Relative Performance Meter and the Chande Trend Meter, to directly compare relative and absolute performance of FB relative to the $SPX.  The range for both the CRPM and CTM is from 0-100, with 20-80 being the neutral region.  As you can see in Chart 3, FB was firmly in the neutral zone, strengthening a bit and then weakening significantly after the price action on the 19th.  This is consistent with the sideways action in Chart 1, and thus FB was not as attractive as stocks with CRPM >80 and CTM > 80.

 

Chart 3: FB was in the neutral zone (between 20 and 80) on both a relative basis (y-axis) and absolute basis (x-axis).  It strengthened a bit late last week. Observe the large move from the 16th to the 19th reflecting the sell-off.

 

Volume Related Indicators were Neutral

The volume-driven indicators were mostly neutral.  For example, The On-balance Volume was mostly flat and not too clear on the direction (see Chart 4).  The Chaikin Money Flow was positive and remained positive even after the drop on the 19th (see Chart 5).  The Negative Volume Indicator, which indicates action of smart money, was bullish, since it was above its 255-day exponential moving average (see Chart 6).  The Percentage Volume Oscillator was also neutral (since it was below zero).  Thus, the conventional volume-based indicators were not particularly helpful. 

 

Chart 4: On balance View had flattened out but not too far from recent peaks, so no clear indication of any impending weakness.

 

Chart 5: The Chaikin Money Flow Volume was positive at the end of last week, and still positive after the sell-off.

 

 

Chart 6: The Negative Volume Index was bullish since it was above its 255-day EMA, even though it had drifted lower in February.

 

Chart 7: The Percentage Volume Oscillator, which is the difference of two moving averages of volume, was below zero, also not pointing to any break. At best, it was showing the volume supported the breakout in early February, and the sell-off that followed, and had slowed a bit since then.

 

A Different Volume Indicator

Frustrated with the pre-built volume indicators, I decided to build my own.  Schematically, I wanted something that looked like Chart 8. The x-axis would look at up-day versus down-day price action, schematically like the approach underlying the RSI, by separating up-days and down-days, but without any weird moving averages. On the Y-axis I wanted a volume measurement, indicating volume on up-days and down-days such as the approach in the OBV.  I visualized a scale from +100% to -100%, so that all volume was on the up-side or down-side, and all price moves were to the up-side or down-side.  So, if the look-back period was x-bars (intra-day, daily, weekly, monthly or yearly), then if all x-bars were up-days, we would have a score of (100, 100) and if all x-bars were down-days we would be at (-100, -100).

I show the recent price action in FB in Chart 9.  First, notice that the range of values on the x-axis is quite small, consistent with a flat-to-sideways price action shown in Chart 1.  Second note that the volume led the price declines, with action volume on down-days picking up last week, leading into the sell-off on the 19th.  Thus, we got an early warning in this approach more clearly than the volume-based charts 4-7 above

 

Chart 8: Schematic of the volume-price action I wanted. If all x-bars were up-days, the score would be (100, 100) and if all x-bars were down days, then the score would be (-100, -100).

 

Chart 9: Using a 50-day look-back period and the action since Feb 28, the weakening in the FB chart starting 13-March is clear.  Thus, volume leads price to the down-side over the critical days before the price break in FB.  Note also the large move on the chart from Mar 16 to Mar 19 due to the sell-off.  Note the relatively small numbers on the x-axis which suggest a flattening price action, consistent with the big-picture in Figure1.

 

Summary

The drop in FB was not well telegraphed by the built-in volume indicators in StockCharts.  The price-based indicators, such as SCTR and CTM were more helpful: either neutral or marginally bullish, and thus signaled that FB was not trending higher strongly, consistent with the sideways price pattern since November.  (Choppy trading is the norm during flat-to-sideways periods.) The CRPM/CTM plot clearly showed the neutral chart status since FB remained in the region between 20-80 leading up and into the sell-off.  The volume-based indicators were not helpful as a group.  However, my take on this area seems to show the rise in volume on down days more clearly coupled with a very flat price action, opening the door to choppy trading, which is how one could interpret the chart (at close of business on 3/19/18).   More significantly, the large gap down suggests the potential for further selling, following my blog post on gap breakouts.  Thus, the two new chart types here seemed to be more helpful, at least in this case.

I hope you have enjoyed a look at how the technical indicators were set up for FB before its big drop, and will subscribe to the blog using the quick link below.

 

Tushar Chande
About the author: , PhD, MBA, is the inventor behind an impressive collection of technical indicators, including the Aroon and Stochastic RSI. He has written several books, holds both a PhD in Engineering and an MBA in Finance, and has over two decades of experience trading the financial markets. Follow Tushar in this blog as he highlights his new "Trend Meter" indicator and shares his analysis of current market conditions. Learn More
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