A CMT’s Technical Take on Facebook

Everyone’s got an opinion about Facebook these days.

And as Mark Zuckerberg spent two days chatting with Congress, you can bet your bottom dollar that everyone and his brother was trying to figure out whether the stock is a “buy” or a “sell.”

I figured I might as well throw my hat in the ring.

I think it’s a “sell.”

Mind you, I’m writing this “sell” opinion without any knowledge of what Zuckerberg revealed in his testimonies. Or how investors will react once he’s back in the comfort of Silicon Valley and his signature grey t-shirt.

Personally, I’m interested in how the saga plays out. But I won’t be making any investment recommendations on my personal opinions, subjective assessments, or gut feel.

Remember, I’m a “technical” analyst… a “quant.”

I conduct statistical research on historical price action. And I design systems that tell me when to be in a stock and when to be out – all without requiring specific knowledge about a company’s fundamentals, or what its CEO will or won’t say in front of Congress.

Of course, others here at Dent have opinions on those matters. In fact, Rodney recently outlined his thesis for why Facebook’s a “buy” at these levels – in contrast to my technical “sell” opinion. You can check that out here. And even though our analysis is somewhat in disagreement at the moment, I imagine we’ll be on the same page soon enough – either when Rodney’s risk-management measures kick in (if stocks turnrn lower), or when my technical systems reinitiate Facebook’s “buy” rating (if stocks continue higher).

At any rate, one of my systems, which I’ve used for many years now, is designed to keep me invested in stocks a majority of the time (since stocks go up in the long run)… while occasionally recommending a move to cash when one of three “sell signals” is triggered.

These sell signals are simple, since they must be flexible enough to work around a broad range of stocks and ETFs.

One is: If today’s price is lower than the stock’s price six months ago, sell. 

The second one is: If today’s price is more than 20% below the stock’s one-year high, sell. 

The third one is: If the stock’s RSI indicator (a measure of short-term momentum) has stayed below 50 for 15 consecutive days, sell. 

Now, these sell signals don’t trigger that often – particularly during a bull market, of course.

The goal is to stay invested as much as possible. And only move to cash occasionally, in an effort to avoid the worst of bear markets and crashes.

Facebook Inc. (Nasdaq: FB) isn’t “old enough” to remember the last crash. And Zuckerberg himself was only 14-years-old during the dot-com bubble.

Hi company went public in May 2012. And unless you count the 58% drop the stock suffered in its first four months of trading (an anecdotal argument for never buying an IPO!)… the stock is fully untested in a broad-market crash scenario.

Still, I have a pretty good idea how Facebook’s stock will fare when the bear comes knocking. It will, like almost all stocks in a bear market, plunge… 20%… 30%… 40%… or more.

And – more importantly than forecasting the exact timing or magnitude of Facebook’s fall – I can show you how my “three-sell-signals” strategy (outlined above) can help you avoid the worst of the carnrnage.

For that, consider how Amazon.com (Nasdaq: AMZN) fared in its first broad-market crash – the dot-com tech wreck.

Shares of Amazon had reached a high of $113/share by early-December 1999.

Nearly two years later, in October 2001, they were going for $5.50.

That’s a 95% plunge!

But most of that massive loss was avoidable, if you simply moved to cash when any one of my three sell signals was triggered.

That sell signal came in late-December 1999, when you could still get out of Amazon at around $82.

Sure, you were already 27% off the peak by that point – a potential bruise to your ego. But that’s sure as hell better than losing a full 95%!

All told, my three-sell-signals strategy kept you safely out of Amazon from December 1999 through February 2002… at which point it began recommending “buys” at prices ranging from just $13 to $15 a share!

You see, that’s an important point people forget when they’re mulling over whether to sell a beloved stock holding, like Facebook or Amazon.

You can always buy back into the stock at a later date! (Often, at far better prices!)

Selling a stock doesn’t mean you’re giving up on the company. It doesn’t make you a disloyal, fair-weather friend.

It’s simply a matter of protecting your capital… choosing to wait out the rocky times safely from the sidelines, and then reinvesting once the dust has settled.

This strategy has worked quite well on Amazon, turnrning $100,000 into $8,388,000… while spending 48% of market days in cash… and, thus, largely avoiding the worst of both the 2000-2002 and 2007-2009 market crashes.

And I expect it’ll work just as well on Facebook’s stock, which under the strategy’s signals has turnrned $100,000 into $310,000 in under five years.

For now, though, all three of my sell signals have triggered on Facebook.

That’s why my technical take on Facebook is a “sell.”

There’s no way to know how the market will digest Zuckerberg’s Congressional soothings. There’s no way to know exactly when the next bear market crash will reach the point of no returnrn.

But, for now at least, the stock’s technical position is weak… and I’m steering clear.

Adam O’Dell

Editor, Cycle 9 Alert

Follow me on Twitter @InvestWithAdam

P.S. I’ll update you when my system recommends a new “buy” for Facebook. And if you’re looking for “alternrnative” ways to beat the market, and Facebook, click here to see my current Cycle 9 Alert portfolio – I think it’ll surprise you.