Shares of video games maker Electronic Arts (NASDAQ:EA) have fallen approximately 16% in recent weeks since pushing to new all-time highs in mid July. Much of this move lower came on the back of the company’s latest earnings report in July. As a result, however, EA stock has now arrived at a crossroad on its chart that could offer plenty of technical support for a bounce. Traders and investors take note.
One of my early trading mentors used to remind me that the more points of my analysis (fundamental or technical) come together at one point, the more legs support the bullish or bearish thesis. As I learned over the years, this simple rule also applies when it comes to chart analysis alone.
Simply put, the more different ways of measuring technical support or resistance line up together in one price area the better the odds this area of support/resistance will hold. These so called confluence zones on the charts are an invaluable thing to learn for both traders and investors alike. As an added benefit, if/when a confluence zone gets broken then a trade in the opposite direction immediately becomes validated. In other words, confluence zones are make or break areas for trades and thus offer well-defined risk … and that is something any experienced market participant can come to appreciate.
EA Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
To put all of this into some perspective, let us look at a multiyear weekly chart of EA stock. Here we see that the stock in recent years rose within a clearly defined channel as marked by the blue-arrow parallels. Just before its recent earnings report, the stock tapped and arguably marginally overshot the upper end of said trading channel in mid July. Stocks and other asset classes have a tendency to mean-revert, i.e work off overbought or oversold conditions with a move in the opposite direction.
In the case of EA stock we see that its recent drop, in good part due to the post-earnings flop, has now mean-reverted it back to the lower end of this trading channel. While this alone is no reason just yet to buy the stock, it helps to keep in mind where this stock now trades in the bigger picture.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see that EA stock over the past few weeks has been chopping back and forth around an area of confluence support made up of 1. a simple support line (blue arrow), 2. the 200-day simple moving average, and 3. horizontal support. Additionally note that from a momentum perspective as measured by the MACD momentum oscillator the stock remains significantly oversold.
Less risk-averse traders could now go ahead and buy some EA stock around the $127 area for an upside target in the mid $130’s and a top loss at $124. More risk averse traders will first want to wait for the stock to stage a bullish reversal.
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