Over the past year, Activision Blizzard (NASDAQ:ATVI) stock has had two cluster zones for trading. Unfortunately, it remains inside the lower of the two zones. But today, a possible scenario could provide enough oomph to lift Activision stock out of its funk and into a higher tier.
Source: Gamevil Inc. via Flickr
Activision’s problems started last November when it reported earnings. Wall Street hated Activision’s earnings report and, as a result, ATVI stock tanked. On its first leg down, Activision shares gave back 25% before it ultimately tumbled all the way to the Christmas bottom of $44 per share.
But the problems did not stop there. Yes, what started out as a market-wide correction morphed into an ATVI-specific problem. The indices bottomed in December, yet Activision stock fell another 15%. It didn’t hit rock bottom — below $40 per share — until its most recent earnings report.
I’m not here to argue over the reasons for Activision’s plummet, nor am I here to see if the situation has remedied itself … rather, I’m writing today to see if there is a chance that ATVI stock can bounce out of these depths.
In Activision’s recent earnings report, I noticed a potential bullish trigger. The trigger played out, and the bulls took out the $44.30 per share level. Since then, they filled the target from that breakout but therein lies the next opportunity.
If buyers continue bidding Activision stock higher and ATVI closes above $49.50 per share, it could trigger yet another leg higher. The exact breakout point isn’t a hard line, however — it’s a zone. Yes, there is a clear fail level at $48.90, but there are also many other resistance levels at $48, $49.50, etc.
The target for the next leg could be to fill the gap at $51. But the juicer one to close would be the gap that happened last November. This would carry ATVI stock to $63 per share.
This is not an easy scenario, so don’t expect it to unfold without a hitch. What is certain, is that it’s not the time to close the bets on ATVI.
How to Trade ATVI Stock
If I am already long the stock I’d stay in it. I could even sell upside calls if I want to create some synthetic dividends. If I’m going long ATVI stock, I’d pull the trigger sooner rather than later. Activision shares trade with momentum, so it moves fast and doesn’t provide clear entry points.
On Monday, the stock markets rallied while ATVI spiked 3.5%, which was almost three times the performance of the S&P 500, Take-Two Interactive (NASDAQ:TTWO) and Electronic Arts (NASDAQ:EA). Clearly there is more interest in ATVI at this point.
I don’t typically like to chase upside momentum this late in the game, but this one looks like someone knows something about it that’s worth a bet. I consider this a battle of the open gaps.
Now, ATVI has many gaps to fill: some below, several above. If bond prices continue falling — and markets sustain this rally — I expect ATVI to stay ahead of the pack.
Click to Enlarge
If I don’t want to risk $47 per share to own Activision stock, use the options market. Your risk there is much smaller, so you can better stomach the wild action. Sell puts in ATVI to generate income or buy calls/spreads as an alternative.
Bottom Line on ATVI Stock
Fundamentally, ATVI is not cheap: it sells at price-earnings ratio of 23x, but it’s not bloated either. The fall from grace shed a lot of the froth. The question to ask is if Activision stock has a chance to recapture its old glory.
The stock has two clear zones of trading, one above the $63 area and one below it. This rally brings the opportunity for a step change. But to be realistic, ledges this big leave a lot of resistance behind, so it won’t be easy. Luckily, these mini catalyst lines I shared today should at least be a start toward that end. On the downside, it’s important for ATVI to hold $44.75, so as to maintain the higher-low trend off the bottom.
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.
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