Small Cap Zynga on Fire After Key Acquisition

Small-cap stock Zynga Inc. (ZNGA) surged to a four-year high last week after the San Francisco-based game maker missed first quarter earnings estimates by a penny and guided second quarter revenues below estimates. The initial sell-the-news reaction ended after the company announced a $200-million share repurchase program and acquisition of privately held Gram Games for $250 million in cash and performance incentives. 

Zynga stock roared out of the gate following a 2011 IPO, lifting quickly to an all-time high at $15.91. Farmville's enormous popularity attracted intense buying pressure during the brief uptrend, with speculators betting that the game on the Facebook, Inc. (FB) platform would mark the birth of an entertainment empire. The subsequent fall from grace shook out newly minted bulls, carving an 89% decline into February 2016's all-time low at $1.78.

A four-year basing pattern finally yielded a new uptrend in May 2017, while the latest quarterly report opens the door to gains that could reach the 2014 high at $5.89. More importantly, that level marks the last barrier ahead of a key test at the IPO opening print, which now marks major resistance. Even so, the slow but steady uptick isn't likely to duplicate the torrid buying wave that caused so much excitement more than six years ago. (For more, see: How to Game the Video Game Industry.)

Zynga Weekly Chart (2011 – 2018)

The stock turned lower after the December 2011 initial public offering at $11.00, carving support near $8.50, and took off in a momentum-fueled advance that topped out in the mid-teens in March 2012. The subsequent pullback reached the IPO opening print in April, triggering a breakdown and vertical decline that lost nearly 40% in a July 2012 down gap before bottoming out at $2.09 in November. 

Committed buyers then returned, carving a modest uptrend into March 2014, when the rally ran out of gas after filling the big gap between $3.00 and $5.00. It turned lower into November, finding support at $2.20, ahead of a dead tape that held within a 92-cent trading range into a February 2016 breakdown. That selling climax undercut the 2013 low by 29 cents, marking a buying opportunity ahead of constructive action that reached 2015 range resistance in May 2016.

The stock broke out in May 2017, confirming the first uptrend in more than two years, and posted a three-year high at $4.34 in November. A pullback into the second quarter of 2018 held support at the 200-day exponential moving average (EMA), establishing a base for an uptick that accelerated after last week's news. The monthly stochastics oscillator crossed into a buy cycle in April 2018, underpinning the current advance, while the weekly indicator has just reached the overbought zone. This potent combination supports continued gains into the third quarter.

A Fibonacci grid stretched across the 2014 into 2016 downtrend organizes current price action while identifying hidden levels that may affect the short-term uptrend. The rally into December 2017 stalled at the .618 retracement level, while the recent breakout also mounted that harmonic resistance level. The .786 retracement at $4.99 now marks the final barrier, ahead of a 100% price swing that reaches the 2014 high at $5.89. (See also: How to Draw Fibonacci Levels.)

On-balance volume (OBV) has just surged into the 2014 high, pointing to intense buying interest while setting off a bullish divergence that predicts price will play catch-up. However, buying high in hopes of selling higher may be difficult with just 50 cents into the next resistance zone. A better plan will be to wait for a breakout above $5.00 or a pullback that tests new support between $4.00 and $4.20.

The Bottom Line

Zynga stock has shaken off the massive decline that followed its 2011 public offering and entered a strong uptrend that is gathering momentum after a key acquisition and buyback announcement.

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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