Activision (NASDAQ:ATVI) tumbled 2.6% on Friday amid heavy selling pressure following its quarterly report. Nearly 12 million shares of ATVI stock traded as the videogame giant cracked multiple support zones.
Partial blame lies with the broad market sellfest, but the root cause was likely its underwhelming earnings announcement. Today we’re breaking down how to trade ATVI stock now that its trend is broken and bears have taken control.
This has been an earnings season for the birds. Activision’s reaction to its latest numbers wasn’t unique. Very few companies are exiting October unscathed. Traders sold stocks from virtually every sector.
And many had earnings and sales numbers that were quite good. The damage was particularly deadly in technology, which is the industry that ATVI stock calls home. The Nasdaq-100 ETF (NASDAQ:QQQ) closed out the week at its lows with a drop of 6%.
In isolation, profit-taking following earnings wouldn’t worry me too much. But, when combined with the surge in novel coronavirus cases across the globe and heightened uncertainty ahead of the presidential election, it demands a more defensive posture. If that weren’t enough, the broad market indexes all cracked support and their respective 50-day moving averages.
It’s worth keeping this increasingly bearish backdrop in mind when analyzing the fallout in ATVI stock.
ATVI Stock Chart
The weekly trend showed signs of slowing ahead of this week’s rollover. It echoed the sluggishness that was seeping into the entire tech sector. But it wasn’t until this week’s whack that sellers finally pulled prices below pivot lows. With the floor giving way, we now have the formation of a lower pivot low. In case it wasn’t obvious, this isn’t bullish.
The volume bump during the slide doesn’t help matters much either. It signals distribution or the exodus of institutions. For now, rallies are suspect, and the path of least resistance has shifted from up to down.
Drilling down to the daily reveals a fresh downtrend with a price drop that just increased in momentum. We’re heading south below the 50-day and 20-day moving average, with the 200-day looking like the next logical target near $72. The last test of this long-term smoothing mechanism in March spelled the low for Activision’s correction, so I wouldn’t be surprised if buyers emerge at its doorstep this go around as well.
Though I’m undoubtedly a bear on the chart, the thought of deploying new short trades after the stock has already fallen three days and around 7% isn’t appealing. The risk-reward doesn’t favor aggressive entries. What I don’t mind doing, however, is selling out-of-the-money bear call spreads.
Sell Calls, Collect Cash
The bear call spread strategy consists of selling call options with a strike price above the current stock price. These so-called out-of-the-money options will expire worthless as long as the stock trades sideways, falls, or rises just a little. And when it comes to the ATVI price chart, I think those three outcomes are far more likely than a strong rally.
If you’re willing to wager Activision remains below $83 for the next three weeks, then you can sell the November $83/$88 bear call spread for 50 cents.
The max reward is limited to the initial $50 per spread received. You will pocket it if the calls expire worthless. The max risk is $450, but you’ll lose far less if you simply exit on the rise above $83. Pushing above it would signal ATVI stock is moving back above all major moving averages and a critical resistance threshold. Such signs of strength would invalidate our bearish thesis and justify exiting.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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