ATVI Stock: Warning Signs
I am concerned about Activision Blizzard, Inc. (NASDAQ:ATVI) stock because I have reason to believe the trend that has been so good to investors is now beginning to slow. This developer and publisher of video games has rewarded investors a great deal since 2013 by producing 310% in potential profits.
My concerns stem from the price chart of Activision stock. The overall trend remains intact, but there are ominous signs that the trend towards higher prices has begun to slow. The trend line that has supported ATVI stock during this bullish run could be put to the test.
I have been using price charts to generate investment strategies for over a decade, and I have learned over that time that one indicator alone never serves to produce an effective strategy because there is no one indicator that works 100% of the time. I have found that using multiple indicators in order to generate one trading bias has produced positive trading results.
The following Activision stock chart illustrates the signals that have caused me some concern with regards to the trend.
Chart courtesy of StockCharts.com
Starting in 2014, ATVI stock has put in a simple trend line that has supported price. This uptrend line is created by connecting the troughs on the price chart. This line defines the uptrend in ATVI stock as price continues to move from the lower left to the upper right, creating higher highs and higher lows in the process. This is an example of a perfect uptrend.
The trend line has been tested numerous times and every time the bulls have come in to support the price of Activision stock. At the moment, I am concerned that once again this trend line will be tested, and the following indicators are alluding to such a possibility.
The moving average convergence/divergence (MACD) indicator in the lower panel is a simple and effective trend-following momentum indicator. Signal line crossings are used to distinguish between bullish and bearish signals. The signal is now bearish and it indicates that selling pressure outpaces buying pressure. Essentially, the bears are now in control of ATVI stock.
The relative strength indicator (RSI) in the top panel is an oscillator that measures whether a potential investment is overbought or oversold. Above 70 is overbought and a sell off can be expected. Below 30 is oversold and a rally can be expected.
Both these indicators have created a negative divergence where Activision stock went on to make new highs but these indicators failed to make new highs. A negative divergence essentially means that the recent highs that were created were not confirmed by the underlying momentum and volume indicators, and as a result, the rally is deemed weak and susceptible to a sell off.
These divergences have specifically raised my concerns that ATVI stock may soon test the uptrend line. Divergences suggest weakness, so not only does this suggest a test of the trend line, but the uptrend line might be in jeopardy of breaking as an unconfirmed high may suggest that the buyers might not be there to support the share price as support is tested.
At this current time, I would exit any remaining positions in ATVI stock and wait for a more compelling setup before I redeploy my capital.
Bottom Line on ATVI Stock
I am no longer bullish on ATVI stock even though the trend higher still remains intact. The internal indicators have put in a negative divergence and test of the uptrend line seems like the path this investment is likely to take. I would rather be sitting on the sidelines, awaiting a more constructive setup in Activision Stock.