Tuesday, January 17, 2012

Electronic Arts (EA) in a capitulation sell-off

Electronic Arts is one of very few components of the NASDAQ-100 that, on an hourly chart (180 d 1h), is currently experiencing a capitulation sell-off. Today’s price action may have brought the bearish move to a near-term conclusion.

Let’s first examine Electronic Arts from the perspective of the past few years. Prima facie, EA’s daily chart (4 y D) appears underwhelming; price has maintained a relatively narrow band from November 2008 to the present. That said, a well-defined (though relatively horizontal) price channel can be conjured up between April 2010 and the present; it appears below in red, and it indicates support a dime or two below today’s closing price of $17.74. A horizontal support level at ca. $17.60 is also in evidence.

On the hourly chart (180 d 1h), a different price channel – distinct from that in the daily chart, but similarly well-fitting – indicates support at about $17.60. I qualify this price channel – drawn below as dashed red lines – as robust or well-fitting because it is defined by several points in the data (in this case, 3 points for the upper line and 3 for the lower line) and because it encapsulates nearly all the price action in the period over which it is drawn. Generally, weaker price channels could be defined by as few as three points in total: 2 for one line, and 1 for its parallel opposite.

Confidence in the price channel on the hourly chart is further augmented by soundness of fit of the earlier price channel on the chart, extending over the period of 10.VIII.2011 through 16.XII.2011 and colored grey on the screenshot. A security’s tendency to form and sustain robust price channels tends to be an enduring quality.

The steep, yellow price channel on the far right of the hourly chart is another data point to consider. Formed only over the past fortnight, this channel is markedly steeper than the red channel of which it is a subset. And yet, despite the yellow channel’s steep slope, today’s price action managed to pierce through its lower support line on volume that measured over twice the three-month average.

The sum of these considerations – price action coming into long-term price channel support, price accelerating its downward trajectory (indicated here by breaking support on a steep, short-term price channel), and volume being heavy – strongly suggests the capitulatory end of a bearish move.

Finally, the five-minute chart (20 d 5m) confirms the observation of accelerating bearish price action.

Pursuing a contrarian strategy during capitulatory moves is risky and demands tight and disciplined stop loss orders. Although $17.60 is a logical terminus point for the bearish move, the capitulation may reveal itself to have yet another – still steeper – leg down. Caveat emptor.

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