Meta Platforms Inc. experienced a tremendous surge in its stock price, following an impressive earnings report. In fact, the stock soared by a remarkable 20.9% on Friday, closing at a record high of $474.99. This surge represents the third-largest gain for the company since its IPO in May 2012, with only two other instances surpassing it - a 23.3% gain on February 2, 2023, and a 29.6% gain on July 25, 2013, both of which were also triggered by strong earnings reports.
The Relative Strength Index (RSI), a widely-used momentum indicator measuring recent gains and losses, reached a level of 86.48. This marks the highest RSI reading since July 30, 2013 when it closed at a record high of 89.39.
Despite these impressive numbers, Meta bulls should not be discouraged. While many chart watchers interpret RSI readings above 70 as an indication of "overbought" conditions, implying that a breather may be necessary after an exceptionally strong rally, there is a contrasting viewpoint.
Some experts argue that the ability to become overbought actually indicates underlying strength in a stock. They posit that when the RSI surpasses 70, it suggests that the stock is in an upward trend. This perspective is outlined in Constance Brown's book, "Technical Analysis for the Trading Professional."
In support of this theory, we can look back at the record RSI reading from July 25, 2013 - just three days after the stock's astounding 29.6% rally. Despite closing at a then-record high of 88.27 on that day, the stock continued to rally and become even more overbought.
Therefore, investors should consider the concept of being "overbought" not solely as a technical condition, but rather as a testament to the underlying strength of a stock. As Meta Platforms Inc. continues to surpass previous milestones, its potential for further growth becomes even more apparent.
The Bullish Game Changer for Meta's Stock
In a surprising turn of events, Meta's stock has finally broken free from a year-long slumber following its initial public offering. This breakout spike has completely shifted the long-term narrative on the stock to a bullish one. According to The Wall Street Journal, this breakthrough is known as a "breakaway gap," indicating a significant game changer for Meta's stock.
Although there were minor short-term pullbacks when record Relative Strength Index (RSI) readings were observed in July 2013, they failed to halt the stock's progress. In fact, Meta's stock embarked on a long-term uptrend, making multiple forays above 70 on the RSI.
On February 2, 2023, RSI closed above 85 at an impressive 86.07. This occurred after an outstanding earnings report that exceeded expectations. This historically high overbought reading mirrored a similar situation ten years ago, which resulted in another successful long-term rally.
Undoubtedly, Meta's stock is currently facing historically high overbought conditions. Despite this, it is essential to remember that being overbought does not necessarily mean the rally is over. There is still potential for further growth.
However, it is worth noting that the two previous instances when RSI spiked above 85 were during periods in which the long-term fate of the stock was still uncertain. The stocks were experiencing short-term bounces following long-term downtrends. In contrast, Friday's blast off occurred just days after the stock had reached a record high. As there was no resistance to overcome, Friday's jump could be seen as more of a bullish leap of faith.
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