Trading Blueprint for Activision (ATVI) Earnings Report

Videogame maker Activision Blizzard (NASDAQ: ATVI) reports Q4 2019 earnings post-market Thursday, Feb. 6, 2020 followed by a 4:30 pm EST conference call. Analyst's expectations are for $1.19-earnings per share (EPS) on revenues of $2.673 billion. ATVI shares peaked last week at 61.90 before selling off to the 57.37 monthly 5-period moving average (MA) support in sympathy to rival Electronic Arts (NASDAQ:EA) earnings release. This sets up bearish sentiment heading into earnings. Investors will want to see ATVI differentiate itself from EA on both top and bottom-line beats. The microtransaction money grab has reached a tipping point as gamers lose interest from paying more out of pocket for never-ending upgrades and lack of innovation. This may be offset with its burgeoning esports leagues gaining traction from major sponsors (IE: Mountain Dew, PlayStation, U.S. Air Force and Astro Gaming) and rising viewership bolstered by streaming deal with Alphabet (NASDAQ: GOOG) owned YouTube. EA’s earnings miss may have lowered the bar for ATVI shares to coil higher. Incidentally, rival Take-Two Interactive Software (NASDAQ: TTWO) will also be reporting earnings at the same time.

Macro Context   

The S&P 500 ETF (NYSEARCA: SPY) is our macro market indicator. Market sentiment has recovered from the Coronavirus panic selling that collapsed the SPY to a low of 320.74 post-market on Jan. 31, 2020. The daily stochastic has crossed up off the 20-band to reach the 333.95 Fibonacci (fib) price level, but left price gaps at 330.01 and 326.18 that will need to be filled/retested eventually. News of President Trump’s acquittal from impeachment charges have fueled SPY to new all-time highs in after-hours session.

Technical Analysis

Utilizing the rifle charts, ATVI monthly chart has been in a bullish stochastic mini pup since breaking out through the 48.83 market structure low (MSL) trigger and possibly forming a market structure high (MSH) at 61.90. Bulls need to defend the monthly 5-period MA support at 57.52 to maintain the mini pup. This may be a challenge as both the weekly and daily stochastic have crossed back down. When moving averages are flat or rising while stochastic is falling, this is also a make or break set-up. The nominal trading range measured by the daily Bollinger Bands (BBs) is limited to the 57.52 to 61.90. This is due to the contraction phase, which means expansion is inevitable. The only question is the direction of the expansion. Bollinger bands expand either with a violent price spike that exceeds and then drags the expansion or in a slow grind manner that expands each time price deflects off the 5-period MA.

Sympathy Stocks:

The video game stocks tend to move in the order EA, ATVI and TTWO. The hierarchy shifts during earnings season depending on which company is reporting. When EA reported last week, the downdraft was felt by ATVI and TTWO. EA may have set the bar low heading into ATVI and TTWO earnings. EA has been trying to recover off the 105.12 fib as per the trading blueprint. The tricky factor will be whether ATVI and TTWO produce gaps in the same direction after reporting earnings. If they have diverging gaps, the question is which stock EA will hitch a ride with. If both ATVI and TTWO gap down, then EA likely sells-off further and vice versa on dual gaps up.

Trading Game Plan:

ATVI has a tight price envelope ranges due to the contracting daily BBs. The upper price reversion levels to considering short-selling scalps on the first tests are: 61.90 monthly MSH, 62.70 fib, 65.25 fib and 67.57 sticky 2.50s. The lower price reversion ranges for long scalps on initial tests are: 57.52 monthly 5-period MA, 56.09 fib, 54.13 fib and 52.74 super fib. The most volatility will hit on the morning session right off the opening bell. Use the envelope reversion levels for initial trades off on the second gapper reaction for scalps. The third reaction will form to possibly break the first envelope range if the gaps are contained within and work to expand the daily BBs. Be aware if TTWO gaps in the opposite direction of ATVI. The negative correlation amongst peers ultimately reverts to a positive correlation. In this scenario, keep an eye on which stock EA correlates with and look for the odd man out to eventually follow.