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Don't Buy Facebook Yet

The technical patterns of the social media giant suggest its shares have more ground to give.
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Not long ago, I analyzed and graded the charts of a handful of social media stocks.

Twitter (TWTR) , which received a B grade, closed at its highest price in nearly seven years on Monday. In hindsight, Twitter should have been an A. I seem to be perpetually underestimating Twitter, much to my chagrin.

I've done better with Snap Inc. (SNAP) , which was awarded an A grade. SNAP reached a new all-time high on heavy volume this past Friday.

Three years ago, I wasn't a fan of the stock, as I was concerned about the company's future. However, two years ago SNAP's chart flashed a buy signal near $12. Since then, the stock is up by more than 500%.

Of course, the biggest name in social media is Facebook FB , which is a holding of Jim Cramer's Action Alerts PLUS charitable trust. Facebook is truly a global platform, claiming 2.8 billion monthly active users. Facebook also owns Instagram, which boasts 1 billion monthly active users. Both figures dwarf Twitter, which claims 340 million active users.

I graded Facebook at C-, by far the lowest grade among the stocks analyzed. Since then, Facebook reported strong earnings but also revealed several negatives.

Facebook's user base is contracting, and the company is concerned that it will be hurt by Apple's (AAPL) coming iOS 14 upgrade. Changes in Apple's privacy policies could hurt Facebook's advertising revenues by hindering the company's ability to target ads to its users.

Looking to the charts, Facebook appears to be headed to $245. That's an important support level that has generated three major bounces since last August (arrows).

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Facebook Inc. (FB) Source: TradeStation

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Why do we believe that Facebook is headed to $245? Check out the bear flag pattern that has formed on the right side of the chart (shaded yellow). That bearish formation projects Facebook almost exactly to $245.

We can break a bear flag into three parts. In the flagpole (A), bears are demonstrating their dominance by forcing the stock down. In the flag itself (B), the bulls mount a comparatively weak counteroffensive.

Because the bears have demonstrated their strength (A), and the bulls their weakness (B), the most likely outcome is continued domination by the bears. This projects the stock to point C.

The volume on this chart is also telling. Note how the volume is high when the bears are in control (point 1), but drops sharply when the bulls take the reins (point 2). This indicates that the bears are more aggressive than the bulls.

The fact that Facebook is forming bearish patterns while the major indices trade at or near all-time highs is disconcerting. If you're thinking of buying Facebook right now, you might want to wait.

(FB is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)

At the time of publication, Ponsi was long AAPL and SNAP.