Recent headlines about Facebook (NASDAQ :), such as Bloomberg's "Facebook split would destroy Zuckerberg's social media empire," don't bode well for the technology giant or its stocks. Last week, the US Federal Trade Commission (FTC) filed an antitrust lawsuit against Facebook, "accusing it of misusing its monopolistic social networking powers to stifle competition." A coalition of US states is also part of the lawsuit.
If the social media colossus loses, it will have to divest itself from assets like Instagram and WhatsApp, among others, which could cause massive damage to revenue and increase spending to dismantle the company's integrated platforms and restructure its network.
With this terrible news, you would assume that traders and investors are fleeing the sinking ship and are dumping stock of the Menlo Park, California-based company as soon as possible. However, that has not been the case. Rather, the stock retains its value.
Facebook is down less than 7% since its August 26 record, but it is also up nearly 60% since an initial antitrust investigation in June 2019.
There is a technical axiom that states that if prices don't fall due to bad news, sentiment is very optimistic. In practice, this could mean a number of things:
The bad news is already priced in
The news isn't that bad because investors may not believe the negative outlook will materialize, or
There are other factors that offset the negative theme
Whatever the fundamental case, we now take our cues from the supply / demand balance, which seems to point higher .
As the stock fell for four consecutive days, it found support from the bottom of a symmetrical triangle, reinforced by the 100 DMA. Over the past three days, the price action formed long, lower shadows, showing that dip buy had taken place.
A symmetrical triangle is created when both buyers and sellers increase their positions, and therefore it is symmetrical. As a rule, it has a tendency to break in the direction of the underlying trend, which is moving upwards for FB.
The reason the breakout signals a resumption in the previous direction is that a chain reaction has been set in motion as traders lose their positions and activate winning positions in the direction of the breakout. That's what puts another leg in that direction.
However, it is not obvious that the breakout will be in the direction of the underlying uptrend, but the proximity of the price to the trend line certainly provides a very attractive risk / reward ratio when it occurs.
Trading Strategies
Conservative traders would be waiting for an upward breach to take a long position.
Moderate traders may prefer to receive confirmation via a solid green candle, which would close above 50 DMA to indicate accumulation.
Aggressive traders can intervene at will, provided they work out a plan that they adhere to.
Here's an example:
Trade Sample
Entry: $ 270
Stop Loss: $ 265
Risk: $ 5
Goal: $ 290
Reward: $ 20
Risk: Reward Ratio: 1: 4
