Facebook’s stock dropped sharply last Monday following news that Zuckerberg will be selling up to 75 million shares over the next 18 months. The 4.5% decline caused the stock to negatively break below its 50-day moving average on the most volume the stock has seen in over a month.
This type of heavy one day selling followed by the stair step type of trading we’ve seen in Facebook during the rest of the week is forming a little-known pattern called a Hemorrhage With a Wedge. While the hemorrhage part or selloff can be one day or take place over one week (and you can use a weekly chart), the time frame and direction of the wedging part of the pattern will vary.
The most important piece of information about this type of pattern is that 80% of the time, it will fail – meaning the stock will drop further.
That said, the direction of the “wedging” part of the price action will provide clues as an upward wedge is quite a bit more positive than a downward or sideways move.
In this example, we are seeing a sideways wedge in price after the large 1 week drop in price. As you can see, it’s followed by another leg down which can be very typical.
At this time, the wedging action following the 1 day drop in Facebook is upward which is encouraging however, there are other things to consider when evaluating any stock such as current price position vs key moving averages as well as other indicators.
In the chart below, I’ve highlighted the breakdown that Facebook had last fall using a daily chart with simple moving averages (MAV), RSI and MACD. As you’ll see, the first negative signal was a break below the 50-day moving average which is similar to FB’s current position. The next negative signal from last fall was the 10 day MAV breaking below the 50 day MAV and for now, the recent uptick in FB has held this possible event off.
While Facebook has had a negative breakdown and is forming a potentially negative hemorrhage with wedge pattern, until that 10-day moving average crosses below the 50 day MAV, there is always a chance that the stock will resume its recent uptrend by heavy buying that will push the stock back above its 50-day moving average.
Of course, you’ll want to see other signals as well and using the marked-up chart, you can see what you need to watch for over the next couple of days for either a further breakdown or that positive break back into its uptrend.
For more information about my work, please visit my website MEM Investment Research
Mary Ellen McGonagle
MEM Investment Research