A disastrous earnings report for Electronic Arts (NASDAQ:EA) led to another bearish assault on EA stock. But is it really a “game over” situation or a chance to reset and turn apparent defeat into victory on the price chart for contrarian investors?
Let me explain.
Initially, Thursday wasn’t a good session for EA stock investors off or on the price chart. The video game giant posted all-around worse-than-forecasted results, which, coupled with the company’s weak guidance, sent shares plummeting by more than 13%. However, as the dust settled later in the day and investors regained their composure, the stock made its way back into the green, up 4.7%.
By the numbers, EA’s Q3 net bookings fell 18.3% year-over-year on weaker-than-expected sales of $1.61 billion compared to the Street’s $1.75 billion estimate. Disappointing interest from Electronic Arts’ FIFA 19 and Battlefield V offerings was another bearish driver for investors. But the real threat behind Thursday’s initial retreat in EA stock was management doling out a “fire in the hole” style warning.
Electronic Arts aggressively cut its Q4 and full-year sales outlook below views. Weak sales and regulatory challenges in China, as well as the competition currently enjoying the latest and greatest offerings for gamers appear to be the primary culprits, which, in turn, forcibly caused the white surrender flag to be waved by bullish investors.
The question remains, is it now really “game over” for EA, the gaming industry and peers Activision (NASDAQ:ATVI) or Take-Two Interactive (NASDAQ:TTWO), which also reported terrible quarterly results?
This strategist doesn’t see it that way.
Despite near-term hurdles, Electronic Arts remains one of the industry’s best-positioned companies to take advantage of secular growth in esports, mobile and first-person markets. Longer-term investors also have the bullish trend of an increasingly diverse and inclusive user base to support their position. Ultimately, this demographic shift is moving the industry past its niche stereotyped geeky teenage boy market and opening up the possibility for even greater growth in the years to come for EA stock.
EA Stock Monthly Chart
EA stock’s price line on the monthly chart also stresses the fact that today’s weakness in shares is far from a game over scenario for investors.
The longer-term view shows Electric Arts is currently testing a key longer-term support band backed by the former highs and a couple Fibonacci levels tied to lows in 2016 and 2012. And with EA shares also witnessing oversold conditions on this time-frame, putting the stock on the radar for purchase makes sense. But that doesn’t mean you should buy EA stock today.
To guard against EA stock falling into a potentially unsupportive air pocket and possibly much deeper second support band from roughly $47.50 – $52.50, I’d suggest hitting the pause button for now. Further and also reinforcing this more patient approach, the current area of support extends all the way down to $70.
For like-minded investors looking to play the game properly, waiting for the current technical zone to hold, then find backing from a fully formed and confirmed reversal candlestick on the weekly time-frame is a practical strategy without giving up too much upside. Bottom line and without using a proper zone defense like the one offered here, investors risk shares moving into a questionable air pocket, which could prove to be no man’s land for bulls on the EA stock chart.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.
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