Gaming company Take-Two Interactive Software, Inc. (TTWO) reported earnings after the closing bell on Monday, Aug. 5, and beat analysts' estimates. The stock was hit on Monday after President Trump tweeted that violent video games may have influenced recent deadly mass shootings. Then came the earnings guidance that the "Grand Theft Auto" gaming platform performed better than expected. Take-Two stock traded as low as $112.27 on Monday and then as high as $128.50 on Tuesday morning. The rebound was helped by a "golden cross" on the daily chart and a positive but overbought weekly chart.

Take-Two shares closed Monday, Aug. 5. at $115.38, up 12.1% year to date and in bull market territory at 36.7% above the Feb. 27 low of $84.41. The stock set a fresh 2019 high on the positive reaction to earnings on Aug. 6. This bull market is a consolidation of a longer-term bear market, as the stock set its all-time intraday high of $139.90 on Oct. 1.

The stock is overvalued with a P/E ratio of 27.85 without offering a dividend, according to Macrotrends. The maker of video games benefited from what's called "recurrent spending" as consumers purchase upgrades to already owned games such as "Grand Theft Auto." This game ranks in the top 10 list of combined digital and physical sales.

The daily chart for Take-Two

Daily chart showing the share price performance of Take-Two Interactive Software, Inc. (TTWO)
Refinitiv XENITH

The daily chart for Take-Two shows that the stock has been above a "golden cross" since July 5, when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher prices lie ahead.

The close of $102.94 on Dec. 31 was an input to my proprietary analytics, and the annual value level remains at $92.12. The close of $113.53 on June 29 was another important input to my analytics and resulted in semiannual and quarterly risky levels at $139.89 and $146.73, respectively. The close of $122.52 on July 31 resulted in a monthly value level for August at $102.26. The 50-day simple moving average is $114.68, with the 200-day simple moving average at $105.21.

The weekly chart for Take-Two

Weekly chart showing the share price performance of Take-Two Interactive Software, Inc. (TTWO)
Refinitiv XENITH

The weekly chart for Take-Two is positive but overbought, with the stock above its five-week modified moving average of $117.62. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $80.56. The 12 x 3 x 3 weekly slow stochastic reading is projected to end the week at 90.15, which is not only above the overbought threshold of 80.00 but is also above 90.00 as an "inflating parabolic bubble," which is a warning of downside risk of 10% to 20% when the bubble pops.  

Trading strategy: Buy Take-Two shares on weakness to the 200-day simple moving average at $105.22 and reduce holdings on strength to the semiannual and quarterly risky levels at $139.89 and $146.73, respectively.

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 annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, most recently on July 31. The quarterly level was changed at the end of June.

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.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.