This Stock’s Breakout Could Now Lead to Another Leg Higher

U.S. stocks on Tuesday gave the bulls another strong rally, led by small-capitalization stocks as well as large-cap technology stocks in the Nasdaq 100 as represented by the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ). Within the latter segment lies Facebook Inc (NASDAQ:FB), whose 1.75% rally on Tuesday led to a breakout from a multiweek consolidation period and could now lead to another leg higher.

For some perspective, it is notable that FB stock and the very-large-cap technology stocks in the QQQ ETF have been and continue to be strong trend following stocks, which is to say that buying any dips or breakouts is a good strategy.

FB Stock Charts

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

But the picture is not the same in all time frames for FB stock.

If we zoom out to a multiyear chart we see that this past summer, Facebook stock embarked on a breakout of its well-defined longer-standing up-trend.

This has resulted in dramatic overbought readings on the weekly MACD momentum oscillator (bottom of chart).

Overbought readings like these can last for a considerable amount of time, which is to say that “shorting” a strongly trending stock like FB at this juncture is a low reward to risk strategy.

At the same time the odds are high that ultimately we see the stock mean-revert back toward or into the longer-standing up-trending channel as marked by the black parallels.

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

On the daily chart, we see that from late July to early October, FB stock consolidated nicely, which then led to a breakout and a next leg higher right up to the Nov. 1 earnings report. While Tuesday’s rally hasn’t fully cleared FB stock back above its post-earnings highs from early this month, the move showed plenty of giddiness particularly if one takes into consideration the equally bullish move in the Nasdaq 100 as a whole.

Active traders and investors could now look to play FB stock higher toward the high $180s, although I do not see this upside target getting reached in a straight shot. Any strong one-day bearish reversal could serve as a stop loss for this trade.

More importantly, however, is to keep in mind and respect the still strong long and intermediate term bull trends in the stock.

— Serge Berger

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Source: Investor Place