After almost four years of continuous scandal, starting with revelations in 2017 that Russian operatives had used Facebook (NASDAQ:FB) to interfere in the U.S. presidential election in 2016, the company is now in its latest controversy over political polarization and the toxic effects of social media. Here's an example.
Regardless of all the bad news, FB’s share price has essentially doubled since then. So, do investors not care Facebook most likely misled and deceived the public? Does Wall Street have no soul, no moral, and no guiding principles? Of course, each investor does, I hope, but the financial markets as a whole are about business, profits, and future earnings forecasts, and everything else is secondary at best.
But, one can apply another sentiment measure to see what investors collectively think about a company’s stock price. It is called the Elliott Wave Principle. See for a brief explanation here. The chart below shows the EWP waves since FB’s IPO in 2012. Allow me to explain.
Facebook’s share price, IMHO, counts best as being in (blue) wave Primary-IV of (pink) wave Cycle-1. The current scandal is a good reason for FB’s stock price to drop to the ideal 4th wave target zone between $238-294 before rallying to new all-time highs one last time. This Primary-IV wave is called a correction and is right on time, with the “profit over public well-being” issue the excuse to sell.
There are a few exciting pieces of information in this chart, going from top to bottom. The RSI5 indicator peaked at a maximum reading last month, which often happens at the end of a 3rd wave, in this case, blue Primary-III. More extensive corrections, like in 2018, are foretold by a negatively diverging RSI5 (orange arrow: higher prices on less strength in price). The red dotted arrow shows what we thus should look out for going forward: higher prices at less strength.
Besides, the MACD indicator also made a higher high last month than during the fall of 2020 (dotted green arrow), signaling higher prices are ahead once this correction is over. The dotted red arrow also anticipates negative divergence similar to 2018.
Lastly, and maybe most importantly, the Money Flow Indicator (MFI14) is making lower highs since 2016, while the price has continued to rally. This negative divergence means less money is flowing into FB’s stock at higher prices. Since liquidity drives markets, the drying up of this liquidity means investors’ appetite for the stock is not as great as its price reflects. Once (pink) Cycle wave-1 tops, FB’s shares should be in a multi-year decline back to at least the 2018 lows ($120s), possibly even lower.
Bottom line
The EWP suggests FB is currently in a correction to ideally around $230-290 before it moves to new all-time highs again, despite current allegations. Besides, the technical indicators suggest a higher high as well before a much larger, multi-year correction can unfold.
The fact money flow is grinding lower supports the notion of an ending rally, not a starting one. Price will have to drop below $190s to suggest a much larger top is already in place. But as was said before, the charts do not support this notion at this stage.