Ready Trader One
08/14/18

Powered up, locked, and loaded. Even if you’ve never touched a gaming console in your life, you’re probably aware of the impact video games have had on the entertainment industry, the global economy—and the stock market.

After an electrifying 2017, video game stocks such as Electronic Arts (EA), Activision Blizzard (ATVI), and Take-Two Interactive Software (TTWO) have done a pretty good job of keeping traders engaged in 2018, despite a late-July pullback. All three of these stocks, for example, rallied to record highs in the past couple of months (TTWO just did it yesterday), and they all have double-digit percentage gains for the year.

EA, responsible for such game franchises as Battlefield and Need for Speed (as well as Madden NFL and Star Wars titles) leads the group in this regard, up some 26% year to date—even after taking a -13.65% detour from July 26 to July 30, as shown in the following daily chart:

Electronic Arts (EA), 11/13/17–8/14/18. Electronic Arts (EA) price chart. Held retracement level.

Source: OptionsHouse

That down move came after the company’s July 26 earnings release, which beat top-line estimates but apparently disappointed with modest forward guidance.1 But it wasn’t just any downturn: That three-day pullback, which bottomed around $125.50, just happened to take the stock to a 50% retracement of its December–July rally.

Many traders look for stocks to rebound after making a 50% retracement, and in this case that level has indeed remained a line in the sand for the past two weeks: EA tested it a couple more times before shooting higher on Friday and following through with an intraday rally yesterday. What remains to be seen is whether this bullish price action will result in enough upside momentum to take shares back to their previous high above $150.

No stock—and no single price move—exists in a vacuum. Traders are likely considering a few other factors in the EA scenario:

●Sector strength: The tech sector continued to lead the market throughout its many twists and turns this year, and the Nasdaq 100 (NDX) index is currently closer to making new all-time highs for the fourth time since January than the S&P 500 (SPX) is to accomplishing that feat for the first time.

●Options activity: The LiveAction scan below shows EA call options volume was outpacing put options volume by more than 3:1 yesterday, a potentially bullish development. Also, late last week several individual options series, including October $150 calls and December $160 calls, had volume greater than the existing open interest at the time, which suggests traders were putting on new positions in call options—another bit of market action with possible bullish implications. (Open interest is the number of unclosed positions in an options contract; when traders close positions, open interest decreases.)

LiveAction Scan, high call/put ratio, 8/14/18. Electronic Arts (EA). Potentially bullish options activity.

Source: OptionsHouse

The current wild card may be how well markets hold up to nervousness about the Turkish financial crisis, which weighed on global equity markets for a second-straight day yesterday (US stocks have held up better than Asian and European markets, though).2

Barring a “risk-off” moment that triggers across-the-board selling, though, traders may choose to refocus on relative tech strength, industry momentum, and EA’s ability to hold its 50% retracement level.

 

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1 MarketWatch. EA stock slumps after guidance miss. 7/27/18.

2 Bloomberg.com. Turkey’s Market Collapse Deepens as Rules Are Eased for Banks. 8/13/18.