Long term technical analysis
As of late, technical analysis has been associated with shorter term trading rather than long term holding or investing. It is seen as the tool of day traders, overnight swing traders, scalpers, and higher risk options and forex traders.
When one analyses a stock or currency pair or any other financial instruments from a technical perspective, it is usually to look at potential price targets in the next several days or weeks at most.
Of course, there is nothing wrong with this. The world is changing – always has been – and the way people trade the stock market has inevitably changed along with everything else.
Smartphones and faster internet connection has opened up the markets to increasingly more people and we can access it well, basically at any time and from anywhere.
Easier and faster access has allowed faster and more frequent trading to become possible and boy don’t we want that!
And so technical analysis has been heavily used in short term or very short term trading strategies that we can find in abundance on the internet and social media. Investing or holding a stock for the long term is usually associated with fundamental analysis rather than technical analysis.
While there is merit to this way of thinking, it is not true that technical analysis is only for short term trading. In fact, longer term technical analysis is more accurate than shorter term analyses. This is because, patterns and trends built over a longer period of time are more resilient than those built over shorter periods of time.
So in a way, long term technical analysis is better than short term technical analysis. That is – if one has the patience to wait it out for the pattern or trend to complete itself.
Monthly chart of FB
From a low of around $20 at the end of 2012, FB stock price climbed to a peak of around $220 by early 2020. That’s about a 1000% return over 7 years or around 40% return annualised.
Whether the price can continue to grow at this rate going forward or not, is anyone’s guess.
However from a long term technical perspective, historical price movements and patterns show that FB stock price has formed an ascending triangle pattern which it has broken out of.
After the initial fall post-IPO from around $45 to a low of around $20 (that’s a 50% drop! How many of us can say that we won’t panic in that kind of situation?) the stock price rose pretty strongly until mid 2018 when it entered a period of consolidation.
Of course with much respect to the 2018 version of ourselves, we can only say that it was a consolidation and not a trend reversal after the fact. Many of us I believe saw the double top in 2018 and the subsequent break below the support line.
The 10 year bear market cycle was due. Economic data were not looking too great. The double top was pretty clear for everyone to see as was the break down. Is it just a pullback, or the start of a downtrend? Couldn’t have known at the time. If we did, we’d have all been stocking up on FB stocks then.
Those who sold their positions during this time – especially the ones that did so at a loss – may be cursing themselves for the ‘stupid’ decision they made at the time. “If only I’d just waited a bit longer!” And those that did not take that ‘beautiful’ opportunity may be chastising themselves for their lack of insight “It’s facebook for Gods sake, obviously it was a chance to buy. Didn’t Warren Buffet say ‘Be greedy when others are in fear’!”
While these reactions are just us being the humans that we are, we shouldn’t get too caught up in our ‘poor judgement’. It wasn’t the best decision when we look at it in hindsight, but it might also have been a good decision. After all, it could very well have turned out like what happened with Microsoft in 2000. Yes Microsoft may seem invincible now after years of bull run, but it was also a great company in the 1990’s, yet this happened:
From the peak in 2018, and all the way through the rest of that year and throughout 2019, FB formed an ascending triangle consolidation pattern.
As of January 2020, it appears that FB may have broken out of this consolidation pattern.
An ascending triangle pattern is usually a bullish continuation pattern. The bullishness is greater if the pattern occurs on the background of an existing uptrend.
The monthly chart of FB shows that this ascending triangle pattern indeed formed – over many months – on the back of a strong multi-year uptrend.
Potential target price (TP) – from a purely technical point of view – can be assumed by extrapolating the length of the upward move from the point of breakout (first picture above).
To be a bit more precise (I believe ‘areas’ is a better way of assuming targets rather than specific-to-the-dot values), the lowest was around $20 and the breakout was around $200 which gives a move of roughly $180. Extrapolating that onto $200 would give a possible TP of around $380.
The correct way of understanding this analysis is: “Technical analysis of FB multi-year pattern on the monthly chart indicates that there is a possibility that FB stock price may reach around $380. How long it will take to reach this target is anyone’s guess. It may go there in a pretty straight line or it may take a dive first – for only God knows how long – before going back up”.
Weekly chart of FB
The weekly chart of FB shows that it has just broken out of a cup and handle (CnH). CnH is typically a bullish continuation pattern that is more reliable when formed in the context of an uptrend.
It can be seen from the chart above that this CnH indeed was formed in an uptrend that began around the end of 2018 from a low of around $120 to a high of about $205. The bottom of the cup formed around $175.
Potential TP for this CnH can be assumed by extrapolating the depth of the cup from the point of breakout (black arrows) which gives a TP of around $235.
In this analysis I am using multi-time frame chart patterns as the core analysis. Both monthly and weekly time frames show bullish patterns. However it is not prudent to utilise only one method of analysis, even if done on different time frames.
For this analysis, the trend serves as a supporting indicator for the pattern analysis. A bullish pattern is normally stronger when occurring in an uptrend.
At the moment, the 50 period moving average (MA50) – blue line – is trending above the 200 period moving average (MA200) – green line. Both MAs are sloping upwards. This indicates that FB stock is in an uptrend.
Based on the simple technical analysis above, it appears that – from a technical perspective – the long term technical outlook for facebook (FB) stock is bullish.
Of course as with every other technical analysis, what this shows is merely the probability of an event taking place.
Disclaimer: As with every single technical analysis on netflyp.com, this is NOT meant as a buy or sell suggestion. I am not a certified financial advisor, just an avid self taught trader and investor who loves to write his views for the sake of mutual sharing and learning.