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Social Media Stocks on Fire After Snap (SNAP) Breakout

Snap Inc.'s (SNAP) dramatic breakout lit a fire under other social media stocks on Wednesday, lifting Facebook, Inc. (FB), Twitter, Inc. (TWTR), and "visual discovery engine" Pinterest, Inc. (PINS) into strong upticks. All three companies report third quarter 2020 earnings next week, so this price action signals the start of a speculative period that could translate into longer-term market leadership if quarterly results fire on all cylinders.

KEY TAKEAWAYS

  • The Snap rally ignited buying interest in other social media stocks.
  • Twitter and Pinterest look like the best bets, while Facebook carries greater risk due to the election.
  • Facebook could hit new highs after political headwinds evaporate.

Twitter stock completed the rally outlined on Oct. 2 in Twitter (TWTR) at Cusp of Major Breakout during Wednesday's session, while Pinterest added to a long series of new highs. That leaves Facebook, which topped out in August and entered an intermediate downturn. Unfortunately for bulls, the platform continues to attract unwelcome attention during the presidential race, with complaints of anti-conservative bias from members of Congress. In addition, foreign powers are once again hard at work, attempting to persuade public opinion through bots and fake news.

Wall Street consensus is steadfastly bullish on Facebook despite the controversies, with a "Strong Buy" rating based upon 32 "Buy," 3 "Hold," and just 1 "Sell" recommendation. Price targets currently range from a low of $195 to a Street-high $335, while the stock is set to open Thursday's session more than $20 below the median $300 target. Political headwinds are obviously contributing to this placement, with strong odds that they'll evaporate between November and January. 

Facebook Daily Chart (2018 – 2020)

Chart showing the share price performance of Facebook, Inc. (FB)

A multi-year uptrend topped out at $218.62 in July 2018, ahead of a deep slide that posted a two-year low in the $120s at year end. A two-legged recovery completed a round trip into the prior high in January 2020, ahead of a pandemic-driven decline that carved a higher low in the $130s in March. The stock completed a bounce into the prior peak in May and broke out, testing new support for more than two months before ejecting into a rally that hit an all-time high at $304.67 in August.

Aggressive sellers took control into September, dropping the stock through the 50-day exponential moving average (EMA) before remounting that level near the month's end. Price action stuck like glue to the trading floor until Wednesday, when it took off and rallied to a seven-week high. The on-balance volume (OBV) accumulation-distribution indicator has also turned the corner after a brief distribution phase, adding a measure of support to the uptick.

Facebook Short-Term Outlook

However, Bollinger Bands® highlight hidden resistance that is already coming into play. A one-day uptick reversed at the barrier earlier this month, and a similar turnaround could unfold after this week's buying surge. In addition, the rally stalled at the .618 Fibonacci selloff retracement level, predicting limited upside into next week's earnings report. Relative strength readings follow this mixed theme, with a monthly sell cycle competing with a weekly buy cycle.

Taken together, Facebook could test the summer high after a strong report, but a sustained uptrend will be a tough chore, especially with the presidential election just five days after the release. As a result, it makes sense to stick with Twitter and Pinterest for now because they've already overcome the forces of gravity and political intrigue. Even so, the "F" in the legendary FAANG quartet is likely to post new highs prior to year end.

The Bottom Line

Snap's high-percentage rally has triggered strong buying interest throughout the social media space.

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