FB stock has been in overbought territory for a while now. A near-term correction could be on the cards.
Shares of Menlo Park, California-based Facebook Inc. (NASDAQ:FB) are flying high, continuing their bull run to set new highs of late. FB stock once again set a new all-time high recently, when the stock touched a high of $140.25 on March 16th, surpassing the $140.10 mark which it registered in a day ago. FB stock has continuously set new all-time highs in the last few trading sessions, barring a few. FB stock eventually closed at $139.99 yesterday, and is showing no signs of slowing down even after gaining around 22% YTD. However, as it appears FB stock seems to have pulled through in overbought territory for a while now. As things stand, various technical indicators suggest that FB stock could be in for a near-term correction.
FB Stock Continues To Be In OverBought Territory.
Shares of Facebook (NASDAQ:FB) have not lost steam even after impressive double-digit gains from the beginning of this year. In the same period, the NASDAQ has only managed to gain 9.62%, highlighting how well FB stock has been performing. There's not much wrong with the social media giant's fundamentals, and FB stock is a great long-term buy. But the steady upward surge has pushed FB stock into overbought territory. Two separate technical indicators, the Bollinger Bands and the Relative Strength Index (RSI) indicate that a near-term correction is very much on the cards. To add to that FB stock has also exceeded the support of its 50-day moving average by a wide margin, which suggests that it could correct and revert to the mean.
Let's take a look at the RSI indicator first. For those who are less familiar with technical indicators, the RSI measure is used to detect overbought and oversold situations. When the RSI is above 70, a stock is deemed to have entered the overbought territory, while anything less than 30 indicates the stock is oversold. It is often seen that many individual technical analysts adopt different threshold values but 30 and 70 are the most commonly used threshold values. FB stock entered overbought territory on March 15th when the RSI measure increased to 76.52 from 68.65. It further increased to 77.05 after yesterday's uptick which has set up FB stock to test the $140 mark. Any further uptick would certainly push the RSI even higher, further increasing the probability of a near-term correction.
Now coming to the Bollinger Bands indicator, here's a brief introduction for the benefit of those unfamiliar. Bollinger Bands are two standard deviations from the 21-day simple moving average, plotted above and below, meant to signal an overbought or oversold situation. When the price of a given stock moves closer to the lower band, it is considered to be oversold, while a move closing in on the upper band suggests that the stock has entered the overbought territory. If one takes a look at the chart with Bollinger Bands plotted, we would notice how FB's stock price has moved within these two bands on most occasions. One can also observe from the chart that every time the stock price went above the upper band there has been a fall in stock price. Presently, FB stock price is almost touching the upper band and any further move upwards might take it past the upper band which could trigger a correction in FB stock.
Facebook (NASDAQ:FB) stock is fundamentally very sound. It has multiple growth drivers and is headed much higher in the long-term. There are many reasons to buy FB stock and indeed, the stock has enjoyed a phenomenal run. However, technically speaking, the risks are clearly visible. As many on the street believe, the current bull run is getting a bit too long and the stocks may be over inflated. One may not see a full-blown correction in near-term, until and unless there is a major correction in the broader markets. However, a pullback to support at the 20-day moving average is very probable, as a post on InvestorPlace points out. The short-term resistance at $140 could also trigger a wave of short-term profit-taking. Our FB stock coverage has outlined a largely bullish outlook for the stock in the long-term, but in the near term, the stock may be due for a correction, before it is headed higher again.