Facebook Shares Might Surf Elliott Wave To $58

(Wikipedia)

Can Facebook trade to new highs? After all, its CFO Mr David Ebersman has recently sold off nearly 1 million shares! We can look at the charts of Facebook and see if doing some Elliott Wave analysis can help us figure out the possibility of new highs in this stock.

Can Elliott Waves warn of impending moves in advance?

Before we come to the question of whether Facebook can make new highs, let us consider if Elliott Waves are capable of warning us in advance of any major moves in the stock market. Soon after Facebook made its debut on Nasdaq in 2012, I visited with John Dobosz of Forbes and we did a quick video interview. I explained that Elliott Waves are suggesting that Facebook will trade under $20. That was certainly not welcome news to a lot of Facebook fans, but it sure did reach to a low of $17.55. Here is the link for that interview with John.

How the First Wave higher developed for Facebook

According to Elliott Wave theory, all impulse waves are made up of five waves. The first wave off the significant low for Facebook also unfolded in five sub-waves as shown in the chart below. It is indeed possible to show that each of these sub-waves had their own mini 5-waves in the impulse legs, but that will crowd the chart with too many numbers.

Notice also that we could have anticipated where the fifth sub wave within wave 1 ended by computimg a 61.8% measure of the distance traveled from the point 0 to the point 3 and then add that number to the bottom of the fourth wave. In the case of Facebook, this level was $32.15, and you can see from the chart that Facebook finished its first impulse wave just a few cents above that target.

Second wave for Facebook

Usually, it is quite a challenge to trade the second wave. Investors are worried whether the stock will break the recently seen low and carry on downwards. But Elliott Waves give valuable clues. When a 5 wave move has been posted, completing the first impulse wave higher, the ensuing correction should not go below the bottom where this first wave began. Typically the second wave corrects the first wave only by 61.8%, which is a highly regarded Fibonacci ratio. See here for a discussion about Fibonacci numbers and its application in Elliott Wave trading.

In the Facebook chart below, you can see that the second wave unfolded in three sub waves. Unlike an impulse wave that has five sub waves, all corrections tend to develop in sets of three waves. The personality of the second wave also shows a decline in the speed of the move, and there are Fibonacci relationships between the sub waves too. Moreover, you can see that the second wave came down exactly to the 61.8% retracement level. An additional clue that we get from the second wave is from its structure. Because the second wave happened to be a simple correction, we would anticipate the fourth wave to be complex. This is known as the principle of alternation. But we will come to that later.

Facebook shoots higher in third wave

A trader who uses Elliott Waves knows that the third wave is the most powerful of the five waves. It is during this phase of the upswing that market optimism really gathers steam, and anyway all bears would have been killed already as their stop loss orders get filled. Elliott Wave Theory states that one of the three impulse waves will experience an unusual strength making it an extended wave. This means the wave will travel farther than the usual Fibonacci projection for the third wave i.e. the 161.8% target.

You can see that Facebook has experienced the extension in its third wave. This is the reason why traders would like to capture the maximum distance of a third wave because there always exists a pretty good chance for this wave to extend in most cases.