Video gaming company Electronic Arts Inc. (EA) reports earnings on Tuesday, May 7, with the stock below a "death cross" and below its annual pivot at $98.16 with a negative weekly chart. The stock closed Friday, May 3, at $92.50, up 17.2% year to date and in bull market territory at 25.2% above its Dec. 26 low of $73.91. This bull market move is a consolidation of a longer-term bear market, as the stock is 38.8% below its 2018 high of $151.25 set on July 13.
Analysts expect EA to post earnings per share of 97 cents to $1.08 when it reports results after the closing bell on Tuesday. Some analysts on Wall Street expect the video game maker to show pressure in the developer business, mentioning weak launches in games such as "Battlefield" and "Command & Conquer." The popularity of "Fortnite" is adversely affecting sales of the newer games, reducing operating cash, which could be a drag for the remainder of 2019.
The daily chart for Electronic Arts
The daily chart for Electronic Arts shows the bear market decline of 51% from the July 13 high of $151.25 to the Dec. 26 low of $73.91. On Sept 27, a "death cross" was confirmed when the 50-day simple moving average declined below the 200-day simple moving average, indicating the lower prices lie ahead. This bearish formation was in play when the stock traded as low as $73.91 on Dec. 26. This date proved to be a "key reversal," as the stock closed at $77.89, above its Dec. 24 high of $77.40.
The close of $78.91 on Dec. 31 was the input to my proprietary analytics that resulted in an annual value level of $98.16 and a semiannual risky level of $130.62. The close of $101.63 on March 29 generated a quarterly risky level at $131.32. The close of $94.65 on April 30 was another input, and this resulted in a monthly value level at $76.23.
The weekly chart for Electronic Arts
The weekly chart for Electronic Arts is negative, with the stock below its five-week modified moving average of $95.82. The stock has been trading back and forth around its 200-week simple moving average, or "reversion to the mean," since the week of Nov. 2, with the average now at $94.65. The 12 x 3 x 3 weekly slow stochastic reading rose to 69.21 last week, up from 57.86 on Feb. 1.
Trading strategy: Buy EA shares on weakness to the monthly value level at $76.23 and reduce holdings on strength to the annual pivot at $98.16 and the 200-day simple moving average at $101.72.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February, March and April. The quarterly level was changed at the end of March.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.