How to 'Catch a Falling Knife' on Gaming Stocks

Gaming companies Electronic Arts Inc. (EA) and Take-Two Interactive Software, Inc. (TTWO) beat earnings per share (EPS) estimates in reports released on Feb. 5 and Feb. 6, respectively, but the stocks slumped in reaction to weak forward guidance. Both had value levels that held at the lows, giving traders the opportunity to "catch a falling knife."

Electronic Arts shares closed Friday, Feb. 8, at $97.60, up 23.7% so far in 2019 and in bull market territory at 32.1% above the Dec. 26, 2018, low of $73.91. The stock is also in bear market territory at 35.5% below its July 13, 2018, high of $151.25. Take-Two Interactive stock closed Feb. 8 at $97.14, down 5.6% so far in 2019 and 6.2% above its Feb. 6 low of $91.49. The stock is also in bear market territory at 30.6% below its Oct. 1, 2018, high of $139.90.

Both stocks set their lows on Feb. 6 as Take-Two fell in sympathy to Electronic Arts. Electronic Arts has the more popular games in this cycle and therefore outperformed more significantly following the spikes lower.

The daily chart for Electronic Arts

The daily chart for Electronic Arts shows that the stock has been below a "death cross" since Sept. 27, when the stock closed at $119.38. A "death cross" occurs when the 50-day simple moving average falls below its 200-day simple moving average, indicating that lower prices will follow. This bearish formation was in play when the stock traded as low as $73.91 on Dec. 26. This date proved to be a "key reversal" day as the stock closed above its Dec. 24 high of $77.40. The stock was moving sideways and then had the negative reaction to earnings on Feb. 6, when shares traded as low as $78.00.

The close of $78.91 on Dec. 31 was the input to my proprietary analytics and resulted in three horizontal lines on the daily chart. My annual pivot is $98.16, with semiannual and quarterly risky levels at $130.62 and $134.34, respectively. The close of $92.24 on Jan. 31 resulted in my monthly value level of $78.45 for February, which was tested at the low as the level to "catch a falling knife." Note that the open on Monday was a gap above my annual pivot at $98.16. The 200-week simple moving average is the next price target at $112.71.

The weekly chart for Electronic Arts

The weekly chart for Electronic Arts has been positive since the week of Jan. 11, with the stock above its five-week modified moving average of $92.71. The stock spiked above its 200-week simple moving average, or "reversion to the mean," at $92.61 last week. The 12 x 3 x 3 weekly slow stochastic reading rose to 69.21 last week, up from 57.86 on Feb. 1.

Trading Strategy: Buy Electronic Arts shares on weakness to my annual pivot at $98.16 and reduce holdings on strength to the 200-day simple moving average at $112.71. My semiannual and quarterly risky levels are $130.62 and $134.34, respectively.

The daily chart for Take-Two Interactive

The daily chart shows that Take-Two stock has not been performing as well as Electronic Arts, but the stock did hold my annual value level at $92.12 at its Feb. 6 low of $91.49. This "catch a falling knife" trade has been nothing but a "dead cat bounce." Take-Two has been below a "death cross" since Dec. 14, but the stock did not benefit from a "key reversal," and its gap lower was to a lower low.

The close of $102.94 on Dec. 31 was the input to my proprietary analytics, which resulted in three horizontal lines formed on the daily chart. My annual value level is $92.12, with semiannual and quarterly risky levels at $117.97 and $151.75, respectively. The close of $105.55 on Jan. 31 resulted in my monthly risky level of $122.48 for February.

The weekly chart for Take-Two Interactive

The weekly chart for Take-Two had a false positive close for the week of Jan. 11, with the stock now below its five-week modified moving average of $102.61. The stock is above its 200-week simple moving average, or "reversion to the mean," at $71.07, which is the downside risk. The 12 x 3 x 3 weekly slow stochastic reading ended last week at 26.71, up a touch from 26.13 on Feb. 1.

Trading Strategy: Buy Take-Two shares on weakness to my annual value level at $92.12 and reduce holdings on strength to my semiannual, monthly and quarterly risky levels at $117.97, $122.48 and $151.75, respectively.

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