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Last Wednesday, I began to see signs that Facebook Inc. (NASDAQ:FB - 21.99) could be bottoming in the near term. Miracles do happen from time to time, and since then the stock is up over 15% in about a week and a half. This move has obviously been helped by the broader-market move and yesterday's QE3 announcement, but I continue to see broad skepticism amid the rally, which indicates that some consolidation and then another move higher could be in order.
What is particularly interesting is the pattern that is forming on a daily chart. The pattern that would be formed by such price action is called an inverse head-and-shoulders formation. Opposite of the bearish head-and-shoulders formation, an inverse head and shoulders is a bottoming pattern that will often signal a trend reversal.
The "neckline" of this particular inverse head-and-shoulders pattern is at $22.50, with the left shoulder at the $20 level. A break above $22.50 would indicate that there is more upside to come, and I could target the lows from July 26 near $27 as the next area to take profits on long positions.
Looking back to the middle of August, FB struggled to get through the 22.50 strike. Technically speaking, stocks have "memory," in that areas of support and resistance in the past will serve as such in the future. At its core, a stock price is nothing more than a representation of supply and demand for the shares at that particular price level. In this situation, I believe that dip buyers in FB who were fortunate enough to catch the lows will take profits here, and that glut of supply created by these new sellers should drive the share price a bit lower from here. If this does happen to come to fruition, a pullback to the $20 level would be a welcoming sign for entering a new long position. If buying at $20, I would use a stop slightly below there, which would create a very favorable risk/reward setup for more upside.
Keep a close eye on this pattern to see if it plays out, and be ready to hit the buy button if it does. (Click on the chart below to enlarge.)
Chart courtesy of eSignal