Electronic Arts Inc. (EA), known for developing hit video games like "Madden NFL" and "Star Wars," has formed a scary chart pattern. The stock has been largely left out of the latest stock market rally, and its pain may not be over.
The S&P 500 has hit fresh all-time highs, and many major stocks have led that push. Electronic Arts isn't one of them. Shares are still 50% below the all-time high set in July 2018. Some investors may think that this is a value proposition for the stock, but the charts are telling me that this is a value trap.
Since the start of the year, shares have been consolidating. Now a breakout is imminent. The consolidation has caused the stock to form a symmetrical triangle price pattern. This is where a falling resistance level is converging with a rising support level at almost the same angle.
As the convergence narrows, a breakout becomes increasingly likely. Triangle patterns, including a symmetrical triangle, give traders a lot of information. Not only do we have the two key levels to watch for the breakout, the resistance and support, but we also have a clue about which direction the breakout will likely occur.
We can take the height of the pattern, which is $30 per share, and add it to the breakout point to get an expected price target. Right now, a breakout in either direction is calling for a nearly 30% move.
And that brings us to the last piece of information. A triangle pattern also tells us which direction we can expect a breakout. Triangles tend to be continuation patterns. This means that prices end up going the same way prices were heading before the pattern formed.
By looking at the left side of the chart, we know that prices were heading lower before this triangle was formed. This tells us that prices are likely to break lower from this symmetrical triangle pattern. I'm looking for Electronic Arts share prices to test their December 2018 lows in the mid-$70s.
The Bottom Line
Electronic Arts stock is getting ready to break out. It formed a symmetrical triangle, which signals a price move of 30% in the coming months. An understanding of how triangles typically work means that we can look for prices to break to the downside.