Video game maker Electronic Arts Inc. (EA) gained ground after Tuesday’s closing bell in reaction to strong earnings and upbeat 2017 guidance. The rally has the power to alleviate recent technical damage, but a breakout and trend advance appears unlikely at this time, with video consoles caught between product cycles that will eventually feature a massive push in virtual reality gaming.

The stock resides in the upper-half of Nasdaq-100 component performance after breaking out to an all-time high in June 2016. However, progress since that time has been limited, with lower than average buying volume keeping a lid on price development. Strong sales results during the upcoming holiday season could bring the last supply of skeptics off the sidelines and lift the stock into triple digits in 2017.

EA Long-term Chart (1993-2016)

EA

The stock blasted higher between 1990 and 1994, rising from 38-cents (post three stock splits) to $10.50. It then eased into a triangular trading range that persisted into a 1998 breakout, yielding a strong rally that ended just above $31.00 at the turn of the millennium. The stock struggled for the next three years, held down by the weight on the burst Dot.com bubble.

It cleared resistance in the second half of 2003 and took off in a choppy uptick that topped out at $70 in 2005, more than two years before the bull market ended. Laggard behavior then took control, with price grinding sideways for three years and breaking down during the 2008 economic collapse. That decline did significant technical damage, dropping the price back to 1999 support in the lower teens, where it bottomed out in March 2009.

The subsequent recovery wave failed to gather buying interest, stalling a few months later in the low-20s and dropping into a range with support at the bull market low. It broke down in 2012, hitting a 13-year low at $10.77 before turning higher in August and entering an uptrend that remains in force more than four years later. The rally finally reached resistance at the 2005 high in July 2015, yielding a breakout one year later.  

Long-term relative strength analysis points to headwinds that should limit upside progress into year’s end. The monthly and weekly Stochastics oscillators are engaged in active sell cycles, with the monthly indicator predicting another four to eight months of testing at lower levels. The weekly reading entered a sell cycle at the same time but is quickly approaching oversold technical levels that should limit downside pressure.

EA Short-term Chart (2014-2016)

EA

An October 2014 test at the 200-day EMA (red circle) ignited buying interest, completing a 10-year round trip to the 2005 high (blue line) in July 2015. A choppy consolidation into 2016 drew the handle of a multiyear cup and handle pattern, yielding a June 2016 breakout that dropped immediately into a rising channel. The stock broke the channel to the downside last week, ending the rally and starting a test at breakout support near 70.

On Balance Volume (OBV) matches price action, breaking out to a new high over the summer months and topping out with price in October. It’s now pulling back to a trendline (red line) generated by the prior highs and should bounce with the price when tested. Alternatively, a breakdown ahead of price will wave a major red flag, predicting that cup and handle support at 70 will also fail to hold.

The Bottom Line

Electronic Arts has bounced strongly off a 2-month low after a well-received earnings report but an October channel break above 82 will pose strong resistance while monthly, and weekly relative strength cycles predict lower prices into year’s end. These headwinds tell hopeful bulls to keep their powder dry until the 2016 holiday sales metrics become easier to gauge.

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