Shares of Facebook ( FB) appear to be on the verge of a powerful breakout. The stock closed Monday with a healthy 2% gain with the help of a nice jump in volume.
This impressive action has pushed FB to fresh July highs and sets the stage for a Once the $121 area is convincingly taken out, the stock has plenty of room to run higher.
Back in late April, Facebook exploded to the upside following its first-quarter earnings report. The stock surged over 7% on the positive news but was unable to make any further headway. Two weeks later, after just barely reaching a new monthly high, an ominous top was beginning to form. By the end of May, after just over four weeks of dull post earnings action, it was becoming obvious that Facebook was completely exhausted and would need a deep pullback before getting back on track.
Facebook drifted lower through the early part of June, but the downside remained well-contained despite the ominous April/May top. It took the Brexit selling wave to finally push FB down to a major support zone. As shares reached the April 28 earnings breakout gap, which marked the lower band of the support zone, the stock had pulled back 10%. After the dust cleared on the morning of April 28, patient investors where taking advantage of the low-risk entry opportunity, quickly reversing the selloff in the process.
At the start of last week, Facebook had rallied 10% off the Brexit low. The stock spent the entire week consolidating the gains as it held in a narrow range just above the 50-day moving average. On Monday, Facebook broke out of this healthy pattern and is now set up well for a new bull leg.
In the near term, Facebook investors should take a much more positive view of the stock heading into next week's earnings report. The stock should be considered a low-risk buy near current levels. A close back below $116 would take out last week's low and would reverse Monday's breakout. On the upside, once past the April/May highs, Facebook has plenty of room to run. The stock could travel quite a ways before re-entering overbought status.
Of note, Facebook is scheduled to report second-quarter results July 27 after the close.
From a fundamental perspective, Facebook is a holding in Jim Cramer's Action Alerts PLUS charitable portfolio. Cramer and Research Director Jack Mohr wrote on Monday that they sold a portion of their Facebook position, which was up about 85% from their purchase price. "The move was driven not by any change in our fundamental thesis, but rather to right-size our exposure and avoid the temptation of succumbing to greed following a parabolic run," they wrote. They added:
By Gary MorrowWe want to make it clear that Facebook remains a core holding and among our favorite long-term investments. The company knows how to execute, understands what its consumers want and has proven adept at growing consistently, rapidly and profitably. The stock's tremendous rally reflects much of these capabilities, however, with expectations already rising steadily ahead of the print as prominent sell-side analysts raise their estimates ahead of next Wednesday's earnings release. We expect the name to emerge as more of a battleground in the near term and prefer the certainty of some tangible profits near term over the risk of event-driven volatility. We leave our $145 price target unchanged.
Source: https://www.thestreet.com/story/13644001/1/facebook-is-poised-for-a-breakout-here-s-how-to-trade-it.html
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