The video game industry is roaring. Sony’s (SNE) PlayStation 4 was released last Friday, Microsoft (MSFT) will release its new Xbox this week, and the holiday selling season is fast approaching.
For traders and investors, all this buzz could mean opportunity, although it comes with a healthy dose of headline risk. And it’s not just the box makers like MSFT and SNE that are watched closely; expect game makers like Electronic Arts (EA) to be scrutinized daily for the next few weeks.
Last Friday, the maker of Madden NFL and other popular franchises slipped to the tune of 7.32% on the back of some concerns around sales, despite a positive note from Piper Jaffray on the video gaming industry. Piper Jaffray analysts Michael Olson and Andrew Conner reiterated their overweight ratings on Electronic Arts and some of its closest competitors as a result of their belief in a strong PS4 and Xbox launch, which could bring more investors into the space.
Friday’s negative reaction in the stock price of EA came on big volume and pushed the stock right toward a two-month support line.
Through the lens of the logarithmic multi-year chart, Friday’s damage was contained and merely brought EA back to an area that has offered good resistance since 2009. The area of resistance — roughly between $24 and $25 — held for a few years before being overcome this July, and Friday’s re-test of the lower end of this range thus far simply speaks of some backing and filling before potentially moving higher again.
From a wave-count perspective, the last leg lower from the November 2011 highs into the July 2012 lows may be labeled a final wave 5, which would make the steep rally since a good first wave higher. In other words, any movement below the aforementioned $24-$25 support area would simply be considered a pause in an up-trend that should lead EA to rally in coming months.
EA found support at $24 on the daily chart last Friday, after it sliced through its 50- and 100-day simple moving averages (yellow and blue lines). From here, given all the excitement around the new video game consoles being released, traders are better off waiting for some of the console sales numbers to come in and for some of the emotions and uncertainty around these new devices to settle down.
Should EA fall below $24, then the 200-day simple moving average (red line), currently near $22.50 is the next support. From where I sit, this stock remains better traded from the long side, and I am patiently watching for some bottom/base building from where I can try the stock again with better odds in my favor.
Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.