Facebook Shares Face Make-Or-Break Technical Situation

Facebook Inc FB shares have been one of the “faces” of the most recent legs of the bull market in U.S. stocks. Now that the U.S. equity market is showing cracks in its foundation, let's look at whether Facebook is holding up or leading the way lower.

Fundamental Check

Facebook has an immaculate balance sheet, plenty of cash on hand and huge positive annual cash flows. The company seems to be doing anything and everything possible to switch on more revenue streams as quickly as it can. The only question about Facebook seems to be its valuation metrics.

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With a price-to-book ratio of 10.61, a price-to-sales ratio of 19.71 and a market capitalization of $189.57 billion versus an enterprise value of $175.94 billion, it is hard for anyone but trend-following traders or ultra-growth investors to be interested in Facebook. The price-to-earnings (PE) ratio of 36, however, is not that expensive when considering the expected revenue growth of 34 percent and EPS growth of 25 percentfor 2015. Of course, any hiccup in its business plan would make the PE ratio very expensive in a hurry.

Technical Outlook

Technicians note that Facebook shares already closed below the short-term “correction support” of $73.75, which was created by the 100 percent Fibonacci price projection line. What that means is that more of a correction is very likely and that's the best case. The worst case is that the stock is in the early stages of a new major downtrend.

As of Friday's close, shares were sitting just above the long-term uptrend line support. It appears that any close below $72.25 will violate that trend line and will be another potential nail in the coffin for Facebook shares. The first resistance comes in at the October 1 closing low of $76.55. If that level can somehow be conquered before the trend line is violated, the bulls may have some hope.

It is safe to say that Facebook stock is teetering on the brink of technical disaster. But, it is too early to call Facebook shares “broken down.” This week's trading will be very important for Facebook and the U.S. equity markets. A major turn back to the upside will be required for both to erase the technical damage that has already been done.