Primary Chart: Daily Time Frame, 8-D and 21-D EMAs, Long-Term Fibonacci Levels (Retracements of META's Entire Range), Uptrend from Nov. 4, 2022 Low
SUMMARY:
META remains in a severe downtrend since its all-time high in September 2021. The primary-degree trendline remains unbroken and in effect. A shorter down trendline for most of 2022 has been broken coinciding with its recent upside price action.
META is experiencing a corrective rally, also known as a bear bounce (until proven otherwise).
Bollinger Bands support the idea of further upside with the mouth of the bands expanding, and price walking the bands to the upside. The Donchian Channels also show that price is reaching multi-month highs, and its 21-period range is expanding as price pushes higher.
Target 1 lies at $142. Target 2 is $149. Target 3 is $157-$158. Each target requires that price reach and hold the prior target on a daily close. Each target is a condition precedent for the next target's viability.
Invalidation levels include the uptrend line from November 4, 2022 lows as well as major support levels at $112 (key structural low), $115-$116 (volume profile).
META began its decline much earlier than the broader indices. It peaked at an ATH on September 1, 2021, while SPX peaked on January 4, 2022. It has appeared to lead indices by a few months in this bear market. The long-term uptrend line from 2012 more than a decade ago was decisively broken in early 2022. This suggests that it may take a while for META to begin carving out a new uptrend line at a less steep angle based on whatever bear-market lows are formed—whether that be the November 4, 2022 low or a (likely) new low in 2023.
Supplementary Chart A: Monthly Chart of META with Decade-Long Upward Trendline
The bear-market downtrend lines are shown on Supplementary Chart B. The pink line on the Primary Chart reflects the primary-degree of trend since the all-time high in mid-2022. That line has not been broken, and price remains well below it. The dark-blue line is a shorter trendline that lasts for most of 2022. It was broken to the upside in early December 2022. This is no surprise. Steeper trendlines are less sustainable, and often end up being replaced by their less steep counterparts. The break of the dark-blue line is not an end to the bear market, but it does signal a short-term shift that coincides with the sideways to higher corrective rally taking place.
Supplementary Chart B: Trendlines within META's Current Bear Market
In this bear market, META made its most recent low on November 4, 2022. An uptrend drawn from that low is drawn (pink line on Primary Chart above). META's short-term EMAs show that it has been rallying in earnest since this November 4 low. Note the slope of the 8-D EMA and the 21-D EMA. While these are simple indicators, sometimes their simplicity can cause some to miss the power of their message—indicating the short-term trend. The short-term trend remains positive, with price finding support at these EMAs. When price falls below the 21-D EMA, it quickly rises to reclaim it. See Primary Chart.
The Bollinger Bands also reflect the upward rally, which should be deemed corrective until proven otherwise. The Bollinger Bands are widening at the mouth, and when price pushes through the bands to exhaustion levels (set at 2 standard deviations on this daily chart), it falls back but quickly pushes back into the bands. Yes, the CPI could end this prematurely, but technical analysis suggests this stock has further to run before it resumes its longer-term downtrend.
Supplementary Chart C: Bollinger Bands
Similar to the Bollinger Bands, the Donchian Channels also reflect an increase in volatility to the upside. Price is pushing new multi-month highs, which is easily seen using this indicator. As the upper band of the Donchian presses higher with price touching it, that reflects new 21-trading-day highs. But a quick glance at the chart below shows that the highs exceed all highs since late October lows. The October 2022 highs are the ones that will likely be taken out next if the rally continues.
Supplementary Chart D: Donchian Channels
Major support lies at $112, and $115-$116. In addition, the upward TL can easily be used as an invalidation level for any short-term bullish trades. It can also be used as confirmation for any shorts that wish to enter when the bounce exhausts.
Targets are based on the measured-move concept and Fibonacci proportions. Target 1 is $142. That is the 150-day SMA. Target 2 is $149. This level is the measured move area where wave A (or wave W) equals wave C (or wave Y) from the lows. Target 3 is $157-$158. Target 3 is a confluence of levels including (i) the 1.272 extension of first leg of this rally projected from the start of the second leg, (ii) the .618 retracement of META's entire price range going back to the start of data on the chart, and (iii) the 200-day SMA based on today's date, which lies at $158.
The bounce idea is invalidated if price falls below $112-$116. It may also be invalidated (depending on several factors) if price breaks below the pink uptrend line from November 4, 2022 lows.
Lastly, to quickly and effortlessly see the major support (supply zone) for the current corrective rally, see the blue rectangle below. Breaking this level should signal the next leg lower is underway in the primary-degree downtrend.
Supplementary Chart E: Support / Supply Zone
Thanks for reading, and Happy New Year! May your trades and risk-management work out very well this year.
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Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
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Interestingly, META is holding its own despite all the selling in SPX on fresh recession worries (from bad macro data). SquishTrade is not calling for new all-time highs here, or a new longer-term uptrend at the primary degree. Just some further upside based on the way price is behaving. It's holding an uptrend line quite well. With the unexpected selling in indices yesterday and today, META hasn't even fallen below its 8-day EMA
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On January 10, 2023, META closed at 132.99. Target 1 at that time was $142.
Target 1 was reached today for a 7.7% move up since the date of this analysis. The intraday high was 143.27. If trading long here, tightening stops would be highly recommended.
Trade closed: target reached
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Both targets 1 and 2 have been reached and exceeded. (Target 1 was at $142. Target 2 was at $149.)
When this post was published, META had closed at $132.99. It has risen 15.1% since then. Target 3 is aggressive at $157-$159 but it is also the measured move area. That's possible, but at this point, anyone in a long trade should tighten stops.
While this analysis has worked out nicely, it has given traders few proper points of entry from a R/R standpoint. The stock, like many of last year's beaten down names, has squeezed higher quite fast.
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This rally continues to work well. Past all original targets.
In-depth analysis, very well founded, multiple techniques used and correlated. Great guy. Thanks.
SquishTrade
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@BahamasX, Thanks for reading and commenting! Much appreciated
SpyMasterTrades
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Thorough analysis! I used to always use Donchian Channels back in the day. They were my top indicator.
When I look at META from a long-term investing horizon, this asset is oversold. I'd be looking to buy a small portion as part of a well-diversified strategy on further weakness. It's at the -3 standard deviation from the mean when you analyze its entire price history on a log-linear regression channel. It strikes me as a great buy for an SDIRA that has a multi-decade time horizon. Yet, the Fed is insistent on breaking something / raising unemployment, and since META is in a lot of funds, I won't be surprised to see more weakness in the intermediate term. I'm bearish on equities until the risk-free rate stabilizes and the effect of its meteoric rise is more fully absorbed by the economy. So it's hard to be truly bullish on any stock right now, while the yield curve inversion is at an all-time record.
Your argument makes good sense from a mean-reversion standpoint. Is your argument that it will eventually retake its highs? I am not so sure. A lot depends on the future of interest-rate policy over the coming years, as well as whether FB can survive competition in the social-media space. Not an expert on that at all, but Instagram and other products are popular. Some companies just die over a period of 10-20 years despite mean reversion. I cannot say whether I'm a "believer" in META's future. But I like your view point based on a position trade (even a multi-year investment) based on mean-reversion and the fact that META remains profitable, though not growing like it was the past decade.
I don't use Donchian Channels that often, but I have them on some of my charts hidden, and check them every now and then when moves seem to be underway. Simplicity is not always a bad thing, right?
So what's your best guess about tomorrow? Markets seem heavily positioned toward a weaker CPI. But then earnings and FOMC are just around the corner. I wonder if options-hedging flows keeps markets supported around 4000 until OPEX dates at least, and then wonder if earnings provide the next catalyst down. Tough to tell, but wondered what your view is. :)
SpyMasterTrades
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@SquishTrade, Yes, META will likely not only retake its high but it will go on to pave much higher highs over the long term (years, decades). My reply to the current fear, uncertainty, and doubt is simply: But for this fear, META would not have reached the -3 standard deviation.
The reasons for a given stock's bearishness are usually not relevant to the purely mathematical basis of regression analysis. (I'd only considered the risk of delisting and imminent insolvency). As always, anything can happen, and META could go to zero. However, if both zero and infinity are the literal bounds of price possibilities, then with diversification one will always win in the long term since the length to infinity is always longer than the length from the current price to zero. All you need is to be right just sometimes. Both trading and investing are games of probabilities, though with slightly different rules for success.
As for tomorrow, I have not really done any in-depth analysis to try to calculate the exact figure. Nonetheless, I can say this: we're in a lose-lose scenario. If CPI is hotter than expected, then the Fed may hike more and/or for longer, which is bearish for equities. Whereas if CPI is weaker than expected, then that means the economy is slowing, which is also bad for equities. It is my belief that we’ve already entered a period that, in retrospect, will be considered a recession.
Based on my charting and research I believe we're heading full steam (deeper) into stagflation. Even though CPI is declining, the long-term charts of commodities broke their supercycle downtrend and are likely to continue adding inflationary pressures for the long term, even as demand cools. Earnings will necessarily continue to decline for so long as the Fed is draining liquidity, and then afterward, due to a recession. It's simply impossible for earnings to not decline while the central bank is rapidly draining liquidity from the economy. The tighter monetary conditions do not instantly impact corporate earnings, rather they affect earnings with long and variable lags. The inverted yield curve is a warning that credit is being significantly constrained, and credit creates the most amount of money in our economy. Therefore, so long as the yields remain inverted, corporate earnings will contract correspondingly on a lagging basis in the future.
Some of the highest timeframe charts that I've seen for the S&P 500, including ratio charts, are about as concerning as they can get. Pretty much the only moderating argument I've seen that is somewhat valid is that real rates are far less inverted than nominal rates.
I'll be watching OPEX and reverse repos closely. Despite my bearishness on the S&P 500, there are still nonetheless great opportunities out there. For many traders, market direction doesn’t matter all that much if one trades based on probabilities and uses good risk management.
SquishTrade
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@spy_master, Thanks for your thorough response and helpful perspectives. Love to hear your analytical way of thinking about the broader picture. I read a lot about the macro, and Fed policy, but I mostly rely on experts to break it down (experts similar to Bianco and others like him). Of course, anyone can pay close attention to what the Fed says and does, esp. w/ regard to the dot plot, terminal rates, where the current rate is, etc. But the utility of this only goes so far in swing trading and position trading. It helps to get a feel for why the primary trend continues where it does, and to understand what drives the countertrend rallies to some extnent. But haven't had the time to hone my thinking and analysis of liquidity the way you have. I've been super impressed by your knowledge especially on these issues, and enjoy the discussions and learning from what you say!
I tend to agree with all six of comment's paragraphs, though some of the ratios you're tracking (paragraph 5/6, spreads I assume, such as one index is divided by another) may not be similar to ones that I am tracking, so not sure there.
I don't track reverse repos, and have wondered about the utility of that since it's simply an overnight arrangement, right, between the Fed and other banks / institutions, where the Fed sells Treasuries (issues bonds, borrows, in a sense) to counterparty banks and then receives cash in return, then pays the cash back the next day or two with interest. Is that the basic gist?
SpyMasterTrades
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@SquishTrade, Thank you for the compliments. I feel similarly about not only your excellent posts but also your excellent comments on mine!
What ratio charts have you been tracking that may be dissimilar?
Yes, that is correct, the repo facility involves overnight or very short-term agreements. However, what's most important, is not the length of the agreements (which can be extended), but what the Fed is accomplishing by using the repo facility. In short, the Fed is controlling the money supply with this facility.
The Fed either puts liquidity into or takes liquidity out of the banking system with this facility. The repo facility is the Fed's way of ensuring that banks are lending within a set interest rate range, near its target (the Fed Funds Rate). Since interest rates dictate lending and money creation, controlling interest rates is the primary means by which a central bank controls the supply of money. The Federal Reserve literally tweaks the money supply every day, and it does so with the overnight repo facility (though not exclusively this way). This is why I look at overnight repos -- it gives a daily update on the supply of money!
Of course, there are other nuances about the repo facility to consider, but that is the main gist of it.
SquishTrade
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@spy_master, I was thinking about your first paragraph. What gives you conviction that META will not only retake its high but continue an uptrend well into the future? Many dot-com firms never recovered. Many more went on to disappear forever. And at the time, many thought that they would change the world and last forever. Even Cisco, and Intel, which have survived, have still never reclaimed their dot-com highs, but have largely been range bound for decades now. And numerous other major stocks of decades past have been dissolved. Some don't dissolve but remain zombies for decades, trading ever lower even after amazing multi-decade uptrends that eventually failed. I have heard the statistic that 80% of stocks eventually fail from reputable sources (not Ned Davis, but some other WS research firms like that). If that is true, what makes META special? Perhaps you have insight into the fundamentals and mechanics of its business model that I don't, and I can respect that.
Of course, META is different from many dot-com companies in terms of one metric (profitability). But many other companies that have disappeared from exchanges were very profitable for a long time. Different reasons exist for the failure—or stagnancy for those that survive and just never recover—of each. Vodafone, Eastman Kodak, Circuit City, Radio Shack, Woolworth, and many more before my time.
I just have come to think that any stock, no matter what the line of business, can be eliminated in a matter of months, years or decades after its initial period of existence. The same is not true for SPX which has fairly strict selection criteria, tends to focus on some of the best and strongest in the US, and does drop stocks from inclusion when no longer qualifying.
In short, I don't disagree with your first point. I just wonder how to know these things. I agree that fear has driven it -3 standard devs below its long-term mean, as with any stock that gets extended that far. But institutions have unloaded for a reason. Without institutional selling, the stock can't fall that far. So i guess i just wonder whether anyone can know whether it will continue the uptrend for decades as you suggest. (Of course, powerful bear bounces can be traded and even played as investment regardless of what the fundamentals are.) I completely agree too about what you said on diversification, but that's a separate issue from what I'm mentioning here. Your conviction in META's long-term uptrend in the first paragraph sounds strong, so it sparked my interest.
SpyMasterTrades
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@SquishTrade, What gives me so much conviction that META may not only return to its all-time high in the future but also surpass it by a lot, is the high Pearson correlation coefficient of the log-linear regression channel. In making this statement I rely on several assumptions. First, that META's log-linear regression channel is valid, which can be debated from a statistical perspective. Second, that price discounts everything -- meaning that I do not need to know about the fundamentals of a company because everything knowable about META's fundamentals has been acted on by the market and therefore reflected in its price. This latter point is one that most technicians believe, as it forms the basis of validating technical analysis. Let me ask you this: If you don't believe that price discounts everything, then on what basis do you believe price action has predictive value such that your targets are valid?
In order to be most successful in both investing and trading, one ought to have the highest probability on one's side. Between META achieving and META not achieving its all-time high again, the probability is much more in favor of META achieving it in the future.
In case you're wondering, aside from owning mutual fund shares comprised, in part, by the entire stock market, I have no position in META whatsoever. I am being objective here.
SquishTrade
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@spy_master, I appreciate your objectivity. :) I would trust your assessment even if you had a position, however, despite the slight bias.
To clarify from our discussion on EMH / Dow Theory a couple weeks ago, my position is not that the theory without value. I do think markets are discounting mechanisms, and they work more or less properly, but not perfectly. And not instantaneously. And mass psychology affects the process a great deal in ways that don't allow things to be discounted perfectly, instantaneously, without any flaws. Reality is never as perfect as theoretical models, this is just what I've learned from reading about markets, neurobiology (just a casual interest), and other subjects.
My non-expert opinion is that EMH is framed in such a way as to be too academic, too perfect, to be taken as a sum-total explanation for markets' pricing behavior. Sure, it contributes to our understanding, and sure, it's a huge *factor* in how markets move. But so is mass human psychology. Which is why non-traded data can trend as well and be predicted using TA (such as your unemployment trend analysis): such data isn't reflective of liquid trading, and it can work without the need for "discounting" anything in aggregate ongoing transactions typical of exchanges. And I wholeheartedly agree that markets' pricing and TA is better than fundamentals. Fundamentalists tend to disagree with the market (i.e., market is too high or too low, etc., and set target price based on fundamental factors, which can be right or wrong over time or give too much or too little weight to a factor or issue, or ignore a material issue altogether). Companies can grow and make money but be sold heavily in a time like this. Technicians tend to agree with the market, and make predictions based on current and past price action, patterns, and trends. So no disagreement on fundamentals vs. technicals. I'm fully in the TA camp :)
I just wonder if trends / TA can work on its own merit without the need for EMH to be a perfect and entire explanation that underpins it and the market's movements. 1/2