Electronic Arts (EA) made a big upside gap earlier this month. Prices have traded in a ten dollar range after the gap with mixed technical signals. Prices look like they have stalled with a small bearish divergence and volume has weakened so the risk of corrective pullback has increased.
Let's look at the indicators and updated charts to see how we should play this rally. The last time we looked at EA was on Mar. 24 and we concluded, "The net effect of a cautious daily chart, but still-bullish weekly chart, is likely to be some near-term consolidation. If you are long from November or December, I would consider raising sell-stop protection to a close below $85 to lock in gains." Prices did consolidate until late April and never got close to our suggested sell stop. We will assume that traders and investors are still long.
In this daily chart of EA, above, we can see a runaway gap (a gap within a trend, as opposed to a gap that starts a trend) in the first half of May. As noted earlier, prices have consolidated in a $10 range.
We have a couple of thoughts on this price action. First, when prices gap up within an uptrend, you often see the trend continue after the gap. There has been some strength after the gap, but it ran out of momentum after a week.
Volume has diminished from its surge on the day of the gap. The On-Balance-Volume (OBV) line has moved up with the price action, but the 12-day momentum study shows two equal highs in May, compared with slightly higher price highs. This bearish divergence may be small enough to ignore, but it could develop into more if prices made a further new high that was not matched by a new high in momentum.
In this weekly bar chart of EA, above, we have a mixed picture. The price gap on the daily chart disappears on this timeframe. Prices are above the rising 40-week moving average line, which is positive, but the weekly OBV line has been in a neutral pattern for much of the past two years. A rising OBV line in the past four months is an improvement, but I am not sure it is enough. The weekly Moving Average Convergence Divergence (MACD) oscillator is very bullish, but it is not a leading indicator.
In this Point and Figure chart of EA, above, we can see the rally from the low $80s without the noise and without the price gap. Prices reached their price target of $98 and continued still higher. The $106 level is nearby support and a trade at $104 could precipitate a deeper pullback.
Bottom line: EA could trade sideways a while before its next move, but my unscientific "gut feel" tells me that prices could see a deeper pullback in the weeks ahead. If I was long EA from lower levels, I would raise stop loss protection to a close below $104.