Shares of video game publisher Electronic Arts have encountered rough times recently, experiencing a decline for the 11th consecutive session on Monday. Consequently, the stock has completely retraced its notable breakout from late September. Although it may feel like ages ago, that breakout had actually resulted in an eight-day winning streak. The drastic reversal over the past few weeks has left EA nearly flat over the past three months. Therefore, the true test is imminent. As depicted in the chart, there is currently no signal indicating that EA intends to move higher yet. The silver lining is that the stock has now fallen back to a convergence of support levels, which has improved its short-term risk/return ratio. Illustrated in the chart above are the following: The stock’s previous breakout area marked in blue (147) The upward trend line drawn from the May low in green (148) Key Fibonacci retracement levels in grey: 50% (146) and 61.8% (141) The 200-day moving average in red (143) We are not suggesting attempting to catch a falling knife. In other words, if EA continues to decline, we have no interest in trying to predict a turnaround. Instead, we will focus on potentially buying a price reversal as a mean-reverting trade. Simply put, given the existing damage, we would be optimistic if EA respects this concentration of support. A 61.8% retracement of the drop would establish an initial target of 160. The recommended stop would be at 142 (which falls between the last two support levels mentioned above). It’s also noteworthy that EA is currently oversold for the first time since April. Back then, this condition persisted for several days before a crucial low was recorded. The distinction is that in the spring, most stocks, ETFs, and major indices resembled EA due to the sell-off from late March. Currently, however, the corrective price movement has affected some sectors, but not all. To put it differently, in isolation, EA appears sufficiently washed out to warrant a mean-reverting move. Nonetheless, if the larger growth stocks suddenly lose their collective ground, other stocks that have already endured a challenging period could face further declines. That represents a risk for EA as well. On a broader level, this weekly chart indicates that EA has likewise fallen below a potentially substantial bottoming formation, which it had previously surpassed during the last upward push two months ago. A short-term rebound could help reactivate this pattern as well. — Frank Cappelleri Founder: DISCLOSURES: (None) All views expressed by the CNBC Pro contributors are purely their own and do not represent the views of CNBC, NBC UNIVERSAL, their parent organization, or affiliates, and may have been previously shared by them on television, radio, the internet, or other platforms. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE NOR A RECOMMENDATION TO PURCHASE ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MAY NOT BE ADAPTABLE TO YOUR PARTICULAR CIRCUMSTANCES. PRIOR TO MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
