Monday, December 26, 2016

Is Correction Over or Just Begun for Activision-Blizzard?

Activision-Blizzard (NASDAQ: ATVI) has had a rough couple of months.  The producers of the MMO giant "World of Warcraft" and the single-player "Call of Duty" franchise achieved their 52-week high on 25 October 2016, but that was before a string of disappoints lopped a full 50% off their rise from the 12 February 2016 52-week low.  Some interesting trading opportunities should arise as the home gaming market sorts itself out.

ATVI Daily Chart
So what exactly happened to Activision-Blizzard?  Well, the bad news really started after the close on 3 November.  The company released third quarter earnings, beating EPS by $0.07 and reporting revenue of $1.57 Billion, which was in-line with consensus estimates.  What sent shares tumbling after-hours and in the weeks that followed, however, was some extremely disappointing holiday period guidance in which they:
  • Raised guidance for full year revenue to $6.45 B non-GAAP.  Consensus was for $6.56 B.
  • Raised guidance for full year EPS to $1.92.  Consensus was for $1.98.
  • Raised guidance for the fourth quarter revenue to $1.86 B.  Consensus was for $2.45 B.
  • Raised guidance for the fourth quarter EPS to $0.40.  Consensus was for $0.79.
Naturally, on such disappointing guidance compared to analyst expectations, shares tumbled.  The news didn't improve heading into the pre-Christmas rush, either.  Reports surfaced on 9 December that sales of the company's flagship "Call of Duty" was in serious decline.  CNBC cited NPD's market research regarding November sales of Call of Duty: Infinite Warfare that showed sales declining 50% year over year as compared to the 2015 release of "Call of Duty: Black Ops III."

NPD also reported a continued decline in overall console sales as well as a continued decline of 18% in video game sales and a 28% decline in PC game sales.  Sales of Sony Corp's (NYSE: SNE) Playstation 4 and Microsoft's NASDAQ: MSFT) led the decline in console sales.

The bottom line is that the stage is set for a disappointing fourth quarter when ATVI reports after the close on 9 February 2017.  The question now, though, is whether all of the bad news has been factored into the price or if there's another move waiting in the wings.

The stock is currently trading at the 50% retracement line as measured from the 52-week low to the 52-week high.  That range is especially significant since it marks the entire previous 5-wave impulse.  Now, a 50% retracement is a bit steep, but it's not beyond typical.  The magic number for traders is typically the 61.8% retracement line since we often use that measure as the boundary between a correction and a fundamental change in trend.  Thus far, we've not yet reached that point.

In fact, it's important to note that the poor sales news did not have much of an impact on price, and the stock continued a short term horizontal pattern right into the pre-Christmas close.  Whether or not this means price has bottomed remains to be seen.

Looking now to the chart, we can see a bearish channel that recorded five touches to date along the support line.  Only now is it approaching the resistance side of the channel, and the direction this stock takes from here will likely be driven by what happens when that line is encountered.

The current bearish impulse started at the 52-week high on 25 October as noted previously.  Elliott Wave 1 in the downtrend recorded five sub-waves, and Wave 2 included a classic a-b-c correction.  Here's where the Elliott Wave count starts to get challenging.  Wave 3 appears to be in progress, and to date has completed three sub-waves.  Sub-wave iv is either complete or in progress, but the conclusion is not yet certain.

If this count is correct, then wave 3 must complete to the downside, probable at or just below that major horizontal support line drawn in bold dashed blue.  That implies a short wave v, which is appropriate since wave iii is shorter than wave i.

Of course, this downtrend is likely a corrective pattern, not a true impulse pattern.  If that plays out as an A-B-C zig-zag or flat correction, then our Elliott Wave count is wrong.  We'll have to wait for the market to show us which count is correct.

What adds a measure of doubt to our count is the pattern that formed in the RSI(9) oscillator.  First and foremost, there is a distinct bullish divergence of the lows.  The upward slope of the lows in the oscillator is obvious while the stock itself was recording markedly steeper lows in price.  That's a major sign that the downward pressure on the stock may be abating.  Second, though, is the pattern itself.  The RSI(9) oscillator formed an ascending triangle in conjunction with the horizontal price pattern formed by the stock.  The stage is set for a breakout of the oscillator (in either direction) just as price encounters that diagonal resistance line formed by the channel.

So how are we playing this one?  Well, given the amount of time between now and the next earnings release, coupled with the potential for additional negative news related to the console and PC gaming markets, I'm not looking at an upside play for ATVI.  One may develop, of course, but for me there's too much risk to the long side to make it worth playing.  Rather, I'll be watching for a potential move back to the downside, and will attempt to ride that if it occurs.  The trigger for me will be the behavior at the channel's resistance line.  If we bounce off that, I'll take the short position.  Similarly, a close below the horizontal resistance line with confirming volume will also signal a short entry.

Surprisingly, the short float is only 3.7% with 2.2 days to cover.  If there's a break to the downside, we may see a fair number of short players jump on board, and that will add some short term pressure on our ride down.  The upside pressure, on the other hand, is minimal given the small percentage that would have to cover on an upside move. The bottom line here is we'll add this to our short sale watch list and see how it develops.

Happy Trading.

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