Activision Blizzard, Inc.: This Could Send ATVI Stock Surging

Activision BlizzardATVI Stock: What’s the Holdup?

I have been watching Activision Blizzard, Inc. (NASDAQ:ATVI) stock for some time, and for good reason; I like the chart.

I use charts as the basis to set investment strategies. This process allows me to stay systematic and objective. In my many years in the investment game, I have realized that I was indeed my own enemy. If I let my emotions get the better of me, I usually ended up regretting the series of events that followed.

In order to avoid these emotional pitfalls, I have set hardline rules that I use to enter positions and exit them but, before I do anything, I need to find charts that I find compelling. The criterion usually involves identifiable patterns and adherence to technical signals. Activision Blizzard stock represents a compelling investment vehicle.

The following chart illustrates the trend that has dominated trade in Activision Blizzard stock over the past few years. The trend is clear; it starts from the lower left and moves to the upper right. It is a stair step pattern with higher highs and higher lows, ATVI stock is in an uptrend, and there is no mistaking it.

Activision Blizzard, Inc. NASDAQ Chart

Chart courtesy of StockCharts.com

There was a brief, but fairly large, sell-off in early 2016; a 39% drop in ATVI stock would be enough to scare away many retail investors, but not the savvy investor. These savvy investors could have used the technical indicator know as “Fibonacci retracements” as a tool to acquire shares.

The Fibonacci retracement numbers are a technical tool used by traders to identify where price support and resistance can be found. The most popular numbers eyed by traders is the 50% and 62% retracement levels. Depending on the trading strategy, traders will use these levels to enter or exit their respective trade. The theory surrounding these numbers is that after a stock completes its primary move, it will retrace it by approximately 50% to 62% before resuming the primary trend.

ATVI stock conformed to this tool perfectly. The blue box is what traders refer to as trading into the box. When shares fall into the box, it signals to traders that they should cover on their short positions and to start building a long position. Using this technique to acquire shares has proved to be a winning strategy, and has proved to me that this investment does indeed adhere to technical trading strategies.

Knowing that Activision Blizzard stock reacts positively and decisively to technical indicators, I can formulate a strategy. The following chart illustrates the current pattern in play.

Activision Blizzard, Inc. NASDAQ INDX

Chart courtesy of StockCharts.com

The current pattern that is in play on the price chart of ATVI stock is a “cup and handle” formation. The cup and handle formation is a bullish pattern. I like these patterns because they provide a price objective. A price objective is the last requirement I need to formulate a strategy.

The pattern was confirmed in early July when price closed the horizontal resistance level at $40.00. The projected price objective is $52.00, and it is determined by projecting the depth of the cup above the horizontal resistance level. Once this pattern has resolved itself, shares should not trade back within the pattern. Doing so would suggest that the pattern has failed and that exiting the trade is the only prudent action to take.

A month-and-a-half has past since the pattern executed, and shares have failed to follow through. In order to manage my trade, I would have set a “stop-loss”. The stop-loss is based on the uptrend line, formed using the lows in February, and the horizontal support from the cup and handle. I would set that stop-loss at $38.46, slightly below the trend lines, and avoiding whole numbers. This would allow some buffer in the hopes of not getting stopped out by the random noise that is present in intraday trading. It also limits my downside to less that 10%, while my upside is approximately 30%. This represents a favorable risk vs. return objective.

The Bottom Line on ATVI Stock

Activision Blizzard stock executed a bullish pattern in early July and has failed to follow through. My rules dictate that a stop-loss is set as soon as I enter a trade, in order to avoid the emotional pitfalls that may present themselves as a trade moves against you. Setting exit points at trade initiation is the final criteria in my trading strategy. The worst-case scenario is that I get stopped out a small loss. A small loss gives me that ability to walk away and trade another day.