Chart of the week: are the FAANGS finally losing their teeth?

As corporates pull ads from Facebook, the bulls may be pulling in their horns, argues technical analyst.

We have seen an incredible recovery in most shares since the 23 March Corona Crash lows. In fact, some have even gone on to make new all-time highs that exceed even the giddy heights seen in February, before the effects of the pandemic were fully understood. And this has convinced many that the Corona Crash was just a blip and markets can get back to their bullish ways again. Hmm.

And leading the charge have been the 2019 leaders: The FAANG Gang. This group comprises the big-name US tech issues we are all very familiar with – Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOGL) (aka Alphabet). They are often called the ‘Never Sell’ stocks.

And that moniker has been applied recently because they each massively dominate their sectors, generate huge revenues and all seem invincible, at least to the army of bulls that has been assembled on the back of strong market leadership since the financial crash of 2009. How can their share prices possibly fall with the US Federal Reserve backstopping the share (and other) markets to boot?

As any self-respecting contrarian would ask: just how invincible are their share prices in reality? We do love to pose such awkward questions!

That’s why I am taking a serious look at Facebook and making a case that the best days are behind it, with the signs strong that it made its all-time high at $245 last Wednesday. How bold a claim is that! Here is the long-term chart:

Source: interactive investor. Past performance is not a guide to future performance.

Most investors have pretty short memories, and they have forgotten the massive dip in 2018 when the stock lost 43%. The recent Corona Crash lost a similar amount and the V-shaped recovery by the bulls managed to produce a new high.  What volatility!

But from the high on Wednesday, it fell hard over the following two days to close much lower on the week to produce a well-known reversal pattern – the weekly key reversal. Note there was a similar key reversal in July 2018 that heralded that 43% crash.

Here is a close-up of recent action:

Source: interactive investor. Past performance is not a guide to future performance.

The rally off the March low has moved up in the channel between my tramlines in five waves, with the final fifth wave very likely terminating on Wednesday at the $245 high. Then, on Friday, it crashed below the lower tramline to create a Tramline sell signal that was reinforced by the momentum divergence at the high.

And now, sentiment is finally souring as over 100 brands have just announced ad boycotts due to disapproval of Facebook’s ‘hate speech’ policy. That will impact revenue – and more may join them. The market was already falling when the boycott news hit and now the news is following the market lower.

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Perhaps the rebels are using this rather tenuous concept of ‘hate speech’ as a cover for reducing their Facebook exposure as they see their returns have become unsatisfactory. They are also very likely staring at lower revenues down the track and are pulling in their horns.

It now appears the path of least resistance is down with my first target at around $180, with much lower potential.

For more information about Tramline Traders, or to take a three-week free trial, go to www.tramlinetraders.com. 

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.