About a month ago when Activision Blizzard (NASDAQ:ATVI) stock fell 10% in a day I suggested that we don’t catch the falling knife. I have nothing against the stock but my problem with the Activision stock dip was that it happened during a bullish market period. This was a big picture sign that there is something wrong with this one stock.
This is not the same as saying that the company is doomed. My point is that its stock is broken for now and that I avoid it. A broken stock can be fixed but is up to the company management. They will have their chance today when they report earnings.
Fundamentally, ATVI stock sells at a 25 price-to-earnings ratio which doesn’t sound expensive, but actually isn’t cheap. Facebook (NASDAQ:FB) P/E is 21 and Apple‘s (NASDAQ:AAPL) is 14.
This morning ATVI is getting a boost but it is likely a sympathy bump from Electronic Arts (NASDAQ:EA) or in anticipation of good earnings news.
ATVI reports its earnings today and those who own the stock have to be nervous about it. Three months ago when management reported an okay quarter the stock fell over 20% in a few days. Then the Christmas stock market correction took ATVI even lower to $43.75.
Since then the stock did try to bounce but failed at $51.50 and now wallows around $40 per share. These are levels that were pivotal back in December of 2015 and January of 2017. So clearly there is something wrong with the stock.
The good news is that long term pivot points usually provide support on the way down. So if I own the stock then it’s probably not the time to sell it. This of course depends on the entry point.
This is not the same as saying buy it now for the chance of a rebound. I usually like to see a clear bottoming process before I chase it. Yes, this also means that I am okay missing out on a few bucks in that rebound when it comes.
ATVI stock is not even the leaders in the sector. It lags EA and Take-Two Interactive (NASDAQ:TTWO) badly this year. So Wall Street clearly things there are still reasons to worry. I am not one to fight the tape and I let prices dictate my trades.
Trading Activision Stock
For ATVI, if the earnings are a catalyst and the stock rallies, I would look for the short term $44.30 area to be a catalyst. If the bulls are able to break it then they could push it to close half the February 6th gap to $45.60.
If they are able to close the whole thing, near $48 per share is a bigger trend line to watch. One that could bring about a bigger rally. But that is a lot of hopium to anticipate now. I usually take it one level at a time.
Earnings reactions something slice though many levels at once. If that happens here then I would look for the same levels for support. So if the bulls spike Activision stock past the above lines then I would not engage long unless they prove they can hold them.
So clearly my approach to trading ATVI stock is mechanical with no emotions. How I trade this stock has nothing to do with what I think of the company or its products and services. This is the only way I can make a clear headed decision on how I manage my risk.
If ATVI collapses again on the earnings headline then I’d have to revisit the levels from three years ago to find meaningful support.
Click here for a bonus video that I recently shared discussing FireEye (NASDAQ:FEYE) that could help with the concepts discussed here. 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.
