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STATISTICS


Facebook In Long-Term Price Deceleration Stage

01/14/13 08:43:20 AM
by Alan R. Northam

Long-term statistical analysis shows the downward spiral in the price of Facebook has been slowing, but a long-term reversal in trend from down to up has not yet occurred.

Security:   FB
Position:   N/A

Facebook (FB) started trading 163 daily trading sessions ago on May 18, 2012, at $42.05. From that time until September 4, 2012, Facebook moved in a downward direction until it bottomed at $17.55. From September 4 until today, Facebook has been clawing its way back upward and is currently trading at $31.72 and is still $10.33, or 25%, below its initial opening price.

Looking at the trend of Facebook, from a statistical analysis point of view, I have plotted a 163-day linear regression trendline as shown in the bottom window of Figure 1. Note that this includes the complete trading record of Facebook. I have also added the upper and lower 1, 2, and 3 sigma channel lines. This figure shows that Facebook continues to trade in a long-term (163-day) downtrend as noted by the downsloping linear regression trendline (blue line) labeled "LRTL" on the chart. This figure also shows that Facebook has been trading in a range from +2 standard deviations (+2 sigma) above the linear regression trendline to -2 standard deviations below.

Trading above and below the +2 and -2 sigma channel lines as Facebook has been doing is a sign of volatility. Note that such volatility normally occurs at turning points in the trend, whereas trading between the boundaries of the +1 and -1 sigma channel lines normally indicates a strong trend.

FIGURE 1: FB, DAILY. This chart shows the daily price chart of Facebook (FB) in the lower window along with its 163-day linear regression trendline and associate channel lines. The top window shows the linear regression slope indicator followed by the R-squared indicator in the middle window.
Graphic provided by: MetaStock.
 
In the top window of Figure 1, I have plotted the linear regression slope indicator. In this view, I have shown the linear regression slope indicator based upon a lookback period of 150 trading days instead of the 163 trading days used in the bottom window. I have done this so that we can get a glimpse of the trend of this indicator.

Had I used the same 163 trading days, there would only have been one data point on the chart for the linear regression slope and we would not be able to determine its trend. This is a trick used when examining the complete record of a security. From this indicator, we can see that the linear regression slope indicator is moving toward its zero line.

This indicates that over the long term, the downward price spiral of Facebook has been in a stage of price deceleration. By price deceleration, I mean the downward price spiral has been slowing down. This is a good sign, as price deceleration is normally the last stage of a trend before a reversal.

In the middle window of Figure 1, I have plotted the R-squared indicator. In this view, I have taken the same liberties to show this indicator over a 150-day lookback period as I did for the linear regression slope indicator so as to determine its trend. This view shows that the R-squared indicator has moved downward and has now crossed below the critical level of this indicator. Statistically, a crossing of the R-squared to below its critical level indicates the lack of a statistically significant trend. This then further means that there is no longer a high confidence level that the present downtrend will continue.

In conclusion, Facebook remains in a statistically significant long-term downtrend. However, this long-term downtrend has entered into a period of price deceleration that normally occurs during the final stage of a trend. Further, the R-squared indicator has crossed to below its critical level, indicating that there is no longer a high confidence level that the long-term downtrend in Facebook will continue.

To constitute a long-term reversal in trend from down to up, the closing price of Facebook must move above the +3 sigma channel line, the linear regression slope indicator must move above its zero line, and the R-squared indicator must move above its critical level.



Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

Garland, Tx
Website: www.tradersclassroom.com
E-mail address: inquiry@tradersclassroom.com

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