E Order From Chaos: Trading Facebook's Latest Drama

On May 20, 2020, Facebook (FB) broke out to a new all-time high. For almost a month after that milestone, FB churned as investors and traders blithely ignored the growing pressure of bad headlines and even worse news for the company. Social media companies have been squeezed in a no-win controversy over censorship, free speech, and alleged bias with Facebook doing a particularly bad job in navigating the tense political environment.

The complacency finally broke all at once on Friday, June 26th as fears exploded about an expanding advertiser boycott of Facebook ads. Companies which are contributing to causes of social justice are increasingly dismayed by the ads that appear adjacent to content opposed to their causes and culture. Facebook's stock lost 8.3% on heavy trading volume.

The weekend delivered a fresh onslaught of boycotters. On Monday, FB gapped down for a 2.8% loss. Next, like a light switch, buyers stepped in and hardly looked back for the rest of the day. FB closed with a 2.1% gain. Picture dust nervously settling around a blast zone.

(Click on image to enlarge)

Facebook (FB) is struggling after a major breakdown below prior support.
Facebook (FB) is struggling after a major breakdown below prior support.
Source: TradingView.com

While the trading may look and feel like chaos, I see an orderly pattern that could form the basis of trades. Here are the steps I see:

  • May 27 to June 15: multiple times buyers successfully defend support at the former all-time high
  • June 26: breach of support from the previous all-time high accelerates selling, likely takes out stops, and generates trading volume larger than anything seen during the rolling stock market crashes in March. Part 1 complete for flushing out motivated sellers. FB finds its next level of (tentative) support at its 50-day moving average (DMA).
  • June 29: A gap down likely takes out more stops and extends stock well below its lower Bollinger Band (BB). Part 2 of flushing motivated sellers over-stretches the rubber band. The snap back is so strong, FB manages to close above 50DMA support.
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Disclosure: No positions.

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William K. 1 month ago Member's comment

A pipeline transporting sewerage will begin to smell like a sewer after a while. And it is not likely to be used for drinking water again for a very long time.

The total demise of FB would not bother me one bit, it has become totally obnoxious. Of course the financial loss to investors will be painful, but perhaps the lessons learned may save others. One can only hope that learning does follow.

Dr. Duru 1 month ago Author's comment

That's quite a metaphor!

William K. 1 month ago Member's comment

It is fairly applicable, though. Perhaps a bit harsh, but then I am opposed to haste-mongers no matter what their agenda may be..

Dr. Duru 1 month ago Author's comment

Makes sense. In the meantime, traders and investors have jumped into the dip with both feet! Amazing. My assessment turned out faar too conservative.

William K. 1 month ago Member's comment

For the individuals who are only concerned about making money, no matter what, if it is legal then they will do it. I have just been reading a textbook on business ethics, the section regarding what is legal versus what is ethical. IT seems that there can be quite a difference! But in a fairly free state such as the USA there is certainly a gap. That is the burden of freedom, in that we must individually make choices.

I would not choose to be a slave to making the most profit possible, either for myself or for others. One form of slavery is possibly just as bad as another, in my biased opinion. Biased in that I am opposed to all slavery.