This Stock Looks Ripe for More Near-Term Upside

Shares of video game company Electronic Arts Inc. (NASDAQ:EA) are up 50% for the year in what has been a stellar run for video gaming stocks as a group.

While a percentage return alone in my eye is no reason to buy or sell a stock, EA stock — as a result of the rally — has now reached the upper end of its longer-term price range while at the same time flagging a breakout on the near-term charts. Let’s take a look.

Electronic Arts reported its latest batch of earnings on July 27, where it displayed good numbers but the outlook fell short of expectations.

The stock at first gyrated, but then managed to rally back, i.e. shaking off the news.

Over the past two days, its competitors Take Two Interactive Software Inc (NASDAQ:TTWO) and Activision Blizzard, Inc. (NASDAQ:ATVI) both reported earnings, with investors reacting positively to TTWO and so far mixed to ATVI in after-hours trading on Aug. 3.

More importantly however, the earnings reports are now out of the way, which in my eye could lead to better and more level-headed trading opportunities to set up in these stocks.

EA Stock Charts

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

On the multiyear weekly chart, we see that EA stock as a result of the notable year-to-date rally has reached the very upper end of its longer-standing channel. I have pointed to a similar phenomena in many large-cap technology stocks in this column over the past couple of weeks, and thus it should be no surprise that both TTWO stock and ATVI stock are also trading at or marginally above their longer-standing uptrends.

Note that the MACD momentum oscillator at the bottom of the chart is trading near an all-time record high and while this does not set up a blind shorting opportunity it does in my eye make for low odds of another meaningful leg higher from here before a consolidation phase in any of these stocks. In other words, I would not be chasing higher any of these stocks here through the intermediate term lens.

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

However, because time frame and timing is everything on the daily chart we see that EA stock continues to act well. Note that in early May the stock gapped higher following an earnings report, but a few weeks later began to settle into a consolidation phase. On July 26, the day before the company’s earnings report, the stock broke higher out of this consolidation phase and has been holding on to that marginal breakout thus far.

Lastly, note that on Aug. 2, EA stock attempted a sell-off which, by day’s end, fully retraced back higher, indicating that the sellers remain very weak. This was followed yesterday August 3rd with another up-day on the back of strong earnings out of competitor TTWO stock.

While we still need to see how these gaming stocks react to the earnings from Activision Blizzard in today’s regular trading session, barring a calamity EA stock does look ripe for some more near-term upside toward the $125 area as a next upside target, using the $113 area as a near term stop loss.

Alternatively, if and when EA stock and its competitors finally do get stretched in the near-term and put in some bearish reversals (i.e. one or two solid down-days or failed intraday attempts to rally the stock on the part of the bulls, then intermediate term short-side opportunities should open up that could bring EA stock back into the low $100s.

— Serge Berger

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Source: Investor Place



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