After months of terrible sentiment, the stock market is finally enjoying a win streak. The S&P 500 closed green for five straight days. Sellers are no longer in complete control. This week, every effort to fade rallies has failed. Even on Thursday after a shaky start, buyers stepped in and turned a red day into green. Unfortunately there are still pockets of weakness. Gaming stocks still lag the S&P. Activision (NASDAQ:ATVI) is not one able to shrug selloffs yet.
ATVI is still is suffering down almost 30% in a year. And this morning, Activision stock is looking to open down 10% on a material headline to its business.
ATVI announced that it split away from its design and development partner Bungie and released its rights to popular online shooting game Destiny to them. The company cited reasons that the venture failed to meet profitability goals. So this could theoretically be a good thing in the end. Meanwhile, it is a giant step backwards for the stock today.
Catching falling knives is hazardous under normal circumstances. Doing it after a serious headline that changes the profit-and-loss statement is even more dangerous. It could cost many digits for those who dare to do it.
This is a material change in ATVI’s income stream. Some experts think that it will free up resources so that management will be able to concentrate on more profitable streams. Most Wall Street analysts still rate it as a buy, even as it still trades at the very lowest of their price range. At some point, some of them will capitulate with negative headlines.
This is all to say that Activision stock is on its heels and, in already edgy markets, it is extremely risky to buy it on this dip. But there could be constructive price action that will give the bulls some hope. The Christmas stock market dip may have placed a bottom that could act as solid floor to eventually serve as a base for today’s debacle: $44 per share has been pivotal since July of 2016. Soon thereafter, ATVI broke out into a rally that saw the stock move to a double. It has since fallen 50% off its September highs. I don’t expect those levels to return anytime soon, but there could be a bounce into mid-year 2019.
For those who own ATVI stock, it’s probably too late to sell now. If I owned it all the way down, I wouldn’t sell it at a prior pivot zone. Those usually lend support on the way down. Bulls and bears will want to fight fiercely over them. But I don’t add to my risk yet. I need to see how ATVI stock behaves around $44.
Conversely, those looking to go long on this dip are better served waiting another candle or two. Drops of this size are usually more than one day events.
Fundamentally, Activision is not cheap. It trades at a price-to-earnings ratio of 59. This is roughly the same as Take-Two Interactive (NASDAQ:TTWO), but more than Electronic Arts (NASDAQ:EA). So the value argument is not likely to lend support to its stock yet.
What to Expect From ATVI Going Forward
Buyers need reasons to brave a buy on a correction like this. For the next few days there will be few of those to surface. Sellers will have the advantage over buyers. This 10% dip is essentially a correction. And the stock needs to correct to reflect the changes in potential income.
Technically, there will be a fight at $44 per share with another pivot point $4 lower. So this crisis in Activision stock will eventually pass, but the battle here should be harsh. I see no reason to buy it today, but I can add it to my watchlist as a potential buy in the next two weeks. The trade then would be to buy the bounce late into this quarter or early next.
Markets in general are still in headline mode, so they add another layer of uncertainty to it. Activision stock will need the help of general Wall Street sentiment. The macroeconomic fundamentals are still healthy, but we are nervous about a massive tariff war and a flip flopping Fed.
The S&P 500 enjoyed a 10% rally off the Christmas lows, but in the next few days, we could retrace some of it and retest the February lows. This would be normal price action but to ATVI it would be additional downside pressure, thereby adding to the stock woes. For all the reasons cited here and the uncertainty that comes with such a material headline, I cannot recommend buying the dip today.
Click here and enjoy a free video and more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.