Facebook could see a ‘bear market rally’ after brutal sell-offs, says market watcher

Facebook shares have been beaten into a bear market, and one market watcher says this has set it up for a big rebound.

"We think you have a very high probability of say a 10 to 15 [percent], maybe close to a 20 percent, bounce," Larry McDonald, editor of the Bear Traps Report, told CNBC's "Trading Nation" on Monday. "It will be a bear market rally, and then we might be right back down here to retest the lows."

Facebook shares have fallen more than 20 percent and lost more than $100 billion in market cap from their 52-week highs set on Feb. 1.

At these levels, McDonald says buying the weakness looks attractive.

"We would go in here with a starter position and then add into the forced selling — the capitulation," said McDonald. "We like to buy capitulation."

"Facebook is triggering a number of buy signals down here," he added. "It may very well have a little bit more pain to go, but you want to add into that pain and take advantage of a lot of weak hands being forced out of the stock."

Declines in the past week of trading have put Facebook on track for its worst monthly performance in four years. Its stock is down more than 13 percent in March, making it the third-worst performer on the Nasdaq 100.

For market technician Ari Wald, the string of sell-offs in its shares has tripped a few technical warning levels.

"The damage has already been done," Wald, head of technical analysis at Oppenheimer, said on "Trading Nation" on Monday.

"The breach of $169, in particular, broke the sequence of higher lows that the stock had been in for a number of years," said Wald. "Coming into support at around $145 could possibly be framing the lower end of that range."

Facebook broke meaningfully below the $169 level on March 20. Its shares had briefly dipped below that level in intraday trading during the market-wide Feb. 9 sell-off. Before last week, it had not closed below $169 since October.

"Given weakness versus the overall sector, breaking down versus the tech sector … we just see more attractive opportunities on what we think is going to be a market-wide bounce elsewhere in that group," said Wald.

Facebook has lost 16.5 percent of its share value since a March 17 expose kicked off a scandal over privacy rights. The social platform is facing regulatory scrutiny after data firm Cambridge Analytica accessed personal information from more than 50 million users in its role with President Donald Trump's 2016 campaign.

Since March 16, the XLK Technology ETF has dropped 5.5 percent. The S&P 500 has declined 3 percent.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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