Video Game Stocks Could Shake Out E3 Buyers

Video game stocks hit multi-month and all-time highs as the 2018 Electronic Entertainment Expo (E3) kicked off this week, highlighting a healthy industry that is set to undergo a major transformation thanks to the cloud and lightning fast internet connections. This games-as-a-service subscription model dominated interest in the opening sessions, with Electronic Arts Inc. (EA) set to launch the Origin Access Premier streaming service this summer.

Many analysts now believe that gaming consoles are nearing the end of their life cycles, to be replaced by on-demand titles that can be played on all sorts of devices because they shift the graphic load to the cloud. This won't happen overnight due to latency issues, and Sony Corporation (SNE), Nintendo Co., Ltd. (NTDOY) and Microsoft Corporation (MSFT) will maintain dominance into the new decade, but their physical machines may eventually wind up on the scrap heap. (For more, see: How to Game the Video Game Industry.)

Electronic Arts Inc. (EA) shares broke out above the 2005 high at $71.16 in 2016 and took off in a strong advance that carved a rising channel into the triple digits. The stock cleared the February 2018 high at $131 last week and has now rallied through channel resistance, exhibiting unusual relative strength. On-balance volume (OBV) has moved in tandem with price in recent years, confirming the healthy uptrend. 

Watch price action near the channel break at $140 because this type of rally acceleration often signals trend exhaustion, and E3 may have attracted a large supply of weak hands. Shift attention to the unfilled gap at $125 if it breaks new support because the fill could mark a low-risk buying opportunity. Alternatively, a reversal at or near the channel break should confirm the rally's endurance, opening the door to $150 and beyond.

[To learn more about analyzing patterns on stock charts and determining profitable buying opportunities, check out the Technical Analysis course on the Investopedia Academy.]

Activision Blizzard, Inc. (ATVI) stock pared gains on Thursday after Morgan Stanley issued bullish comments that highlighted an impressive line-up, powered by the Overwatch League e-sports venture. The stock broke out above 2008 resistance at $19.28 in 2014 and entered a channeled uptrend that remains in force more than four years later. The rally topped out at $78.25 in March 2018, giving way to a decline that found support at the 200-day exponential moving average (EMA) in the mid-$60s.

A May recovery wave gathered strength into June, while this week's heavy news flow attracted a fresh supply of buyers, completing the round trip into the first quarter high. This marks a resistance zone, raising the odds for a pullback that should find support at or above the 50-day EMA at $71.50. OBV lifted to a new high this week, generating a bullish divergence that predicts price will soon play catch-up. (For more, see: Activision Blizzard Looking for High Score.)

Take-Two Interactive Software, Inc. (TTWO) stock has gained more than 60% in the past year, nearly doubling the performance of its larger rivals. Morgan Stanley commented on this video game publisher as well, citing management's focus on the launch of "Red Dead Redemption 2." The stock topped out at $120 in November 2017, following an impressive run that began in the low $30s in 2016, and failed a February 2018 breakout after posting an all-time high at $129.25.

The stock broke down from horizontal support at $100 in March and settled in the low $90s. It turned higher in May, remounted broken support and stalled 10 points under the prior high a few weeks later. This week's advance broke six-week resistance, setting the stage for a test at the first quarter high. Unfortunately for bulls, OBV took a major hit between March and May, signaling an institutional exit that will take time to overcome. As a result, shareholders may wish to take profits and head for the sidelines when the stock nears resistance in the $120s. (See also: Take-Two Stock Seen Rising 20% on E-Sports Demand.)

The Bottom Line

Video game stocks surged higher this week in reaction to bullish energy unlocked during the E3 expo. However, these upticks could signal short-term trend climaxes ahead of pullbacks or intermediate corrections. (For additional reading, check out: How Microsoft Plans to Win in Gaming.) 

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