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Technical Update: Facebook

Facebook’s share price is entering an interesting area. Look at the 4-hourly chart in figure 1. It has been retracing a previous move up for a little over a month now. It came down as far as the 0.618 level twice and bounced from it, consolidating between the 0.618 and 0.382 levels.

Figure 1

On Friday, it came down to retest the 0.618 for the third time, and this time it broke through. Volume has been decreasing for the majority of the retracement suggesting it is actually a retracement, rather than a new larger downtrend. That being said, volume did rise above its 20-period moving average on Friday’s break to the downside, suggesting there may be some momentum behind this break.

If you trace the 0.5 and 0.618 levels shown in figure 1 further to the left of the chart, you’ll notice they intercept price again around a significant gap. A blue box is drawn over the gap in figure 2, with horizontal lines extending from the top and bottom of the box.

Figure 2

Gaps like to be filled in, and it is common for the close and open surrounding the gap to be used as support and resistance. While price did fall through the 0.618 level on Friday, it failed to really make any significant progress beyond the lower bound created by the gap. This could hold as support, marking the beginning of a continuation of the uptrend. That could also explain the rise in volume on Friday as it may have been signalling the end of the consolidation phase and a return to the upward trending phase.

Alternatively, should price break below this lower bound, this could go much lower, especially on rising volume. Either way, there is a reasonable probability that this consolidation is coming to an end and we’ll see a breakout either to the upside or the downside very soon. Keep an eye on the key level established by the gap.

If it does break below the levels defined by the gap, how far will it go? This move down could turn into an ‘abc’ correction where a and b have completed (labelled on figure 3) and c is in progress. In this case, it is reasonable to use the price excursion of a as a target for c. This is visualised in figure 4.

Figure 3

Figure 4

A grey box is drawn around wave a, the height representing the price excursion. That box is duplicated and moved so that the top of the box lines up with the beginning of wave c (or the end of wave b). The bottom of the second grey box represents the price target. This level, marked with the purple horizontal line, is given more credibility because it coincides with the previous support from June.

The next couple of days will be important for the technical action. Watch carefully how the market behaves around some of the key levels around here.

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