Facebook: Buying On Pullbacks Is Not A Brilliant Idea

| About: Facebook (FB)

Summary

Bill Maurer recently suggested to buy FB on a pullback.

I believe there's more to it.

I give some suggestions on other technical factors to be aware of to combine with fundamentals.

I read Bill Maurer's recent article on Facebook (NASDAQ:FB), and despite the good fundamental analysis, the technical component seemed to be an after thought.

No matter how good a company performs, you don't blindly buy when price is below or at a moving average.

Think about it. Just as there are many fundamental factors involved in the analysis of a company, there are just as many factors involved when analyzing a chart. It would be like me saying buy GoPro because of a low PE. It is just not enough. So I thought I would take the time to go over additional technical factors to utilize and how to combine them with fundamentals using Facebook as an example.

Support and resistance

There are many ways to look at support and resistance. Some people prefer to look at the chart angularly and as such draw trendlines, pennants, flags and wedges. Others, like myself, prefer to look at the chart vertically, so we draw horizontal support and resistance lines. When most talk about support and resistance, they are referring to the horizontal lines. Again, looking at the Facebook chart paying attention to current market conditions, and assuming a long-only stance, there are a few areas where you could have entered. I have not drawn all the possible points, just the ones that will make this concept easy to understand.

Click to enlarge

As you can see, price clearly bouncing on these levels gave plentiful opportunities to enter the stock. Although this is hindsight, you could have entered the stock when the August crash happened.

Remember, support and resistance levels are zones are not an exact point.

Gaps

Facebook did report huge earnings. Given the market turmoil. I suspect it will fill that gap. What is so special about a gap? They act as magnets really. Sooner or later a gap gets filled. Below is a two-year, daily chart of Facebook. I have highlight the gaps on the chart. As you can see sooner or later the gap does get filled. Does this mean you should enter Facebook every time it fills a gap? No, it is just something to be aware of. Depending on the market climate, that may very well be your chance to enter.

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(Source: Yahoo Finance)

This brings me to the last but most important technical factor to consider.

Overall Market Health

Despite how successful Facebook is, it cannot go up unless the overall market goes up. It's one of those, you have to accept facts such as death and taxes. Below, I overlay the charts of both Facebook and the SPY. At first, glance there might not appear to be any similarity between price movement. Upon closer inspection you should notice that Facebook has a tendency to not drop as much as the overall market, but unless the overall market moves up, Facebook will not experience the above average change in price.

(Source: Yahoo Finance)

Conclusion

These are just a few technical factors to be aware of. I firmly believe that not paying attention to short-term price fluctuations such as a dip, correction or crash will affect the long-term performance of stock returns. Thus, only paying attention to fundamentals and disregarding technicals can have a serious impact on your portfolio. For instance, I recently wrote an article showing that Alibaba (NYSE:BABA) was fundamentally stronger than Amazon (NASDAQ:AMZN). Unfortunately, only paying attention to fundamentals have hurt Alibaba investors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.