Social media website Facebook Inc. (FB) last Friday August 23rd staged a beauty of a breakout of more than five percent, pushing the stock not only to a fresh 52 week high but a brand new all-time closing high at $40.55.
When I last discussed Facebook Inc. (FB) in this column HERE on July 31st, the stock had just reported its latest earnings a few days prior and was still in the post earnings surprise honeymoon phase.
As I voiced at the time : “Such powerful moves often have a few more days of upside momentum before they need to take a near-term breather, and that’s what I see in store for Facebook stock. The post-earnings rally now amounts to a 40%-plus move, and from where I stand, that’s not something I want to chase.”
Sure enough, soon after I wrote the above words the stock settled into a three week consolidation phase, that from a technical point of view took the shape of a bull flag formation. Before getting into that, first let’s revisit the longer-standing chart of Facebook Inc. (FB) below.
The major reference point over the past few weeks of course remains the significant post earnings up-gap, which likely caught the bears by surprise, forcing them to cover short positions as bulls plowed onto the scene in full force. A major trend change had occurred.
The above-mentioned consolidation form in the shape of a bull flag formation that built over the past few weeks all took place around the initial public offering price of $38. After last Friday’s significant rally, resolving the bull flag to the upside, investors who bought the stock at the IPO price or lower are now comfortable in the profit zone.
Through a psychological lens I therefore now see two ‘things’; 1) Those investors for the first time are in a profitable position. While some will take profits on the back of this, it is likely that the majority of the longer-term holders now see their initial belief in the stock to have come true, leading them to stay in their positions or add to them. 2) As this most recent breakout in Facebook Inc. (FB) has come in the face of a weakening broader stock market, it is very possible that momentum and trend follower type investors enter this stock, which could result in much more steady of a rise in its share price.