When it comes to active trading there are hundreds of different indicators and patterns that can be used to forecast a financial asset’s direction. One of the most popular is the Relative Strength Index, or more commonly known as the RSI, because it can signal whether an asset is overbought or oversold. Of specific interest is that traders who rely on the RSI for identifying candidates that could be nearing a major pullback have recently turned their attention to video gaming companies. Newly released games combined with anticipation of upcoming release of major titles have sparked euphoria amongst the bulls and in turn they have pushed the prices of many game-related assets to fresh 52-week highs. In the article below we’ll take a closer look at the charts and try to determine where prices could be headed over the months ahead. (For more, see: Gaming Stocks To Watch In 2017).

PureFunds Video Game Tech ETF

The ever-evolving nature of the video game industry can make it extremely difficult for the average investor to decide how to most effectively allocate capital. It can seem pretty much impossible to pick the next winner, which is why many traders are turning to the PureFunds Video Game Tech ETF (GAMR), which provides investors with exposure to a diverse basket of quality gaming-related companies. Taking a look at the chart, you can see that the momentum is clearly in favor of the bulls. However, it is interesting to note that the RSI has now traded above the $70 level for several sessions, which suggests that the move is overbought. The high reading of $85.37 suggests that the GAMR could be a candidate for a pullback over the weeks ahead. Some bulls may want to remain on the sidelines and try to enter a position closer to the long-term moving average or the ascending trendline near $31.73. (For further reading, check out: Can Games Make You A Better Investor?)

Activision Blizzard Inc.

 When it comes to the video gaming industry there are few players with as much influence as Activision Blizzard, Inc. (ATVI). With a market capitalization of approximately $40 billion, ATVI has a strong competitive advantage over small less liquid companies, which is evident by the strong uptrend shown on the chart. The recent move of the RSI into overbought territory could be a warning signal to bulls that the momentum is starting to lose conviction and that a pullback toward a longer-term moving average is in the cards. Bulls considering opening a new position may want to remain on the sidelines and time their entry closer to a major level of support to put the risk/reward in their favor. (For more on this topic, check out: How To Game The Video Game Industry).

Changyou.com Limited

One of the Chinese gaming companies that is considered a favorite amongst active traders is Changyou.com, Ltd. (CYOU). Taking a look at the chart, you can see that the pattern is similar to those mentioned earlier and that the recent surge in momentum has pushed the RSI indicator into overbought territory. Based on this chart, CYOU is another gaming company that is setting up for a pullback and bullish active traders will likely want to remain on the sidelines until they have the opportunity to enter near a major level of support like those shown near $25.55. (For more, see: How The Video Game Industry Is Changing).

The Bottom Line

Video gaming stocks have been a favorite amongst active traders for a while now, but based on the charts discussed above, the upward momentum may be running out of conviction. The overbought reading on the RSI reading on several gaming related assets suggests they could be poised for a pullback and many traders will likely want to wait until an opportunity arises to open a position with a more favorable risk/reward. (For more, see: Power Up Your Portfolio With Video Game Stocks).

At the time of writing, Casey Murphy did not own shares of any asset mentioned.