Shares of Facebook-parent Meta Platforms Inc. bounced Wednesday off a 20-month low, as a widely followed technical indicator sank to the most oversold level seen since just a few months after the company went public 10 years ago.
The stock FB, +4.07% climbed 3.0% in midday trading, after plunging 31.8% amid a four-day losing streak triggered by a hugely disappointing earnings report and outlook.
The bounce comes as part of a broad rally in the technology sector, and after the stock closed Tuesday at the lowest price since June 2020, to take it 42.4% below its Sept. 7, 2021 record close of $382.18. Also on Tuesday, the stock’s Relative Strength Index (RSI) closed at 21.52, the lowest level since the record-low close of 18.13 on Aug. 2, 2012.
The RSI is a momentum indicator that measures the magnitude of stock price gains, typically over the past 14 sessions, against the magnitude of losses. Many chart watchers view readings below 30.00 as a sign of oversold conditions. Read more about the RSI indicator.
Keep in mind that the RSI is not necessarily a good market-timing tool, as oversold conditions can last for relatively long periods. And some even see oversold conditions as a sign of a stock’s underlying weakness, in that the ability to become oversold confirms the strength of a downtrend.
For example, when the then-Facebook stock’s RSI hit its low on Aug. 2, 2012, which was less than three months after the social media company went public, the stock closed at $20.04, or 47.3% below the $38 initial-public-offering price.
The stock didn’t bottom till a month later, after a further 11.5% drop to $17.73 on Sept. 4. The RSI closed that day at 27.64.
The idea is to wait for a “bullish divergence,” in which the stock keeps falling but the RSI has started rising, for a sign that the stock may be ready to launch an oversold bounce, like what happened in August 2012:
Meta’s stock has dropped 15.9% over the past 12 months, while the S&P 500 index SPX, +1.23% has rallied 17.0%.