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How High Can Facebook Go?

09/26/13 05:12:54 PM
by Koos van der Merwe

Facebook has exploded upwards. The question everyone is asking is, "How much higher can it go?"

Security:   FB
Position:   Accumulate

We all know that Facebook's listing on the exchange was a disaster. We also know that Mark Zuckerberg is a very clever man, and a quick learner. So, placing a bet with Zuckerberg for the long-term can only be an advantage. Having said that, would you buy Facebook (FB) now?

Figure 1. Weekly chart with Elliott Wave count and Fibonacci extension target.
Graphic provided by: AdvancedGET.
The weekly chart in Figure 1 shows how the price touched a high of $44.91 after listing on the stock market in May 2012, then promptly dropped to $25.46 by June 2012. The price continued falling reaching a low of $17.48 by September 2012 before starting to recover, reaching a high of $32.82 by February 2013 in a Wave 1 rise. Wave II saw the share fall to $22.70 by June 2013, and started rising strongly to its current price of $48.52. Elliott Wave rules state that a wave 3 must equal or be greater than a wave 1. The chart shows that WAVE III is so far greater than the 1.618% Fibonacci extension, suggesting that the price could rise to the 2.618% Fibonacci value with a price of $62.34. The RSI indicator is at overbought levels, but has not given a sell signal, so the rise to $62.34 looks possible.

Figure 2. Daily chart with wave count and JM Internal Band indicator.
Graphic provided by: AdvancedGET.
The daily chart in Figure 2 displays an Elliott Wave count suggesting that the share price is tracing a Wave 3 of WAVE III. The RSI indicator is trending down, and has given a number of sell signals that the price has ignored. With the RSI indicator dropping, and the share price rising, we could see the development of a divergence sell signal. The share price should correct in a wave 4 of WAVE III in the near future, taking the price down to somewhere between $45.70-42.52, but with the present optimism in the share price, this could be a gradual correction. The wave 2 correction was a simple correction, which means that the wave 4 correction should be complicated. There is a gap in wave v of wave 3, which price needs to correct to. A price usually drops or rises to fill a gap, however price still has to correct to the gap of July 24.

Note that a JM Internal Band buy signal was given on June 14, 2013, and is still effective. A JM Internal band is a 15-period simple moving average offset by 2% positive and 2% negative. A buy signal is given when the closing price is above the upper band, and a sell signal is given when the price closes below the lower band. A JM Internal band sell signal was given on August 15, 2013 but a new buy signal was given on August 23, 2013.

I would only be a buyer of FB on a correction. The WAVE III target of $62.34 looks tempting. However, the RSI divergence sell that is developing bears watching.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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