The big drop in Facebook stock last week made history as the company lost over $100 billion dollars in market capitalization in a single day. Never before had a stock lost that much in one day, but it happened.
Investors are wondering how that could happen and what is going to happen next.
First of all the bad news that surprised people really wasn’t a surprise.
If you can remember back in the spring, Facebook got hit with a dark cloud of news from the Cambridge Analytica scandal and changes to its news feed that was expected to decrease ad impressions, which is the company’s bread and butter.
In fact in January CNBC reported that time on site for the company’s online users decreased for the first time in a news report.
And the stock dumped in April as the scandal hit.
It is the rally that happened after that stock drop that is the real surprise.
The company announced a big share buyback boost and the stock rallied, which caused short sellers to cover their positions, which meant buying the stock. That built momentum that caused the price to go up and for people to simply chase that action.
The bad news of the first quarter was simply ignored by people or dismissed as if it were not real.
But it was and the company revealed its impact last week on Thursday to cause a teardrop stock drop in Facebook (Nasdaq: FB) shares.
So what is next?
After a stock drops like this with such a surprise it traps everyone who has bought into it at higher prices over the past few months.
That creates simple price resistance on the technical analysis stock charts that is now going to hold the stock down.
So the best case scenario is that the stock goes sideways for months, probably for the rest of the year, to build a base to launch a new really off of.
The problem is the stock has a super high valuation trading with a P/E of 24 so it’s more likely to pause here for a few weeks and then continue lower and lower.
Facebook is not the only stock that looks like it can fall more from here.