Does This Bad News Mean Big Profits?

Ray Dalio’s Bridgewater Associates fund bought 230,000 shares of this stock in the fourth quarter of 2018.

However, the stock is not flying high (yet).

Click here for an opportunity to trade this stock near its 52-week low.

Video game stocks have had a rough time lately, and Activision Blizzard Inc. (ATVI) is no exception.

However, a bullish pattern has developed over the last 2 weeks in ATVI.

In short, this pattern is often referred to by professional traders as, “Bad News, Good Action.”

The bad news, in this case, came on Feb 12th when ATVI announced earnings that beat current estimates, but at the same time the company lowered their guidance for revenues and earnings in Q1 and Fiscal Year ’19.

Wall Street hates lower guidance, and usually pushes stock prices lower when this happens.

At the time, the stock was already in the midst of a sharp decline and had closed at its 52-week low the day before.

However, the market responded with ‘good action.’ The stock rallied sharply over the next few days.

This action suggests that the weak holders of the stock had already sold, and traders and investors who like to buy when things look bad were now in the majority. This is how bottoms are formed.

The chart of ATVI is equally as interesting as its reaction to the news of lowered guidance.

$44 had been a big support level for months, but negative earnings news by Electronic Arts (EA) on 2/6 led to a big volume decline in ATVI as it fell in sympathy with an even bigger drop in EA.

This slide in ATVI’s stock price culminated in the biggest volume down day in years on 2/11.

Then the post-earnings rally beginning on 2/12 pushed the stock back over the $44 level on even bigger volume.

This quick, big volume, reversal from below support to back over it is a technical bottoming pattern.

This technical reversal also set up a nice looking trade opportunity.

The high of the rally off the 52-week low is $46.60 which is also the 50-day moving average.

If ATVI closes over its 50-day moving average and $46.60 before it trades under $43 then the trade is to buy the breakout over $46.60 with a stop under 43.

The 200-day moving average is currently around $65 so even if ATVI were to simply recover back to that average over the next several months then 60 would be a realistic technical target.

That’s a 30% gain on the stock, and potentially more if options are employed.

It’s also interesting that one of the worlds most successful hedge funds, Bridgewater Associates, was buying the stock in the last quarter of 2018.

Trade smart,

Rick Nartarian, Chief Investment Officer
The American Investor Daily