Jim Cramer, with the help of chart master Bob Lang, examines how the fundamentals at video game companies such as Electronic Arts, Take-Two Interactive and Activision Blizzard are set up for a strong run.
by Tom Bemis
Gaming stocks are booming, showing outsized gains this year as fund managers catch on to the profits to be made in the sector. But is it a trend with real staying power, or just another bubble?
To find out, Jim Cramer used his Off the Charts segment during Mad Money on Tuesday to talk with his colleague Bob Lang, the founder of ExplosiveOptions.net and a contributor to TheStreet.com’s Trifecta Stocks newsletter.
To start with, Lang looked at the daily chart of Electronic Arts (EA) , which is actually lagging the group. That’s a relative term, however, since the stock is up 30% in less than six months, including a big jump after its latest results two weeks ago. That gap went from $98 to $108 in a single session. Since then the stock’s been trading sideways, but Lang thinks EA is getting close to another move higher.
That’s because the relative strength index or RSI, an important momentum indicator, has been in elevated territory for the past month and it’s staying strong right here. Lang also notes that the volume has been tremendous. But remember, volume is like a lie detector, when a stock roars on heavy volume, it means the move is telling the truth because the big institutions are buying hand over fist.
Finally, the Chaikin Money Flow oscillator at the bottom of the chart show clear signs of institutional buying. Once this stock finishes digesting its recent gains, Lang believes it could make its way from $108 up to $120 before it needs to take another break.
Activision Blizzard (ATVI) shares jumped after it reported in February, and then the stock traded sideways for a few weeks before resuming its move higher. Lang sees signs of persistent buying from institutional investors: in particular, the Chaikin Money Flow oscillator has been strong nearly all year.
Activision had a shallow pullback last Wednesday along with the rest of the market, but you had to jump on that buying opportunity because the stock came roaring back in short order. Lang believes that will spark more buying on the next dip. Speaking of dips, Activision has a floor of support at its 20-week moving average, which is currently at around $54, down three bucks from where the stock’s trading.
That level held during last week’s sell-off and Lang believes it will hold again. This is the kind of stock where you need to pray for more craziness from the White House to drag down the whole market long enough to get another good entry point.
A third stock in the group, Take-Two Interactive (TTWO) , announced a delay for one of its most highly anticipated games, Red Dead Redemption 2 on Monday. But the company followed up with a strong quarterly report Tuesday morning, sparking more buying.
Lang notes the stock bounced off its 50-day moving average about a month ago, and since then it’s rallied a quick 14 points. And although the The Chaikin Money Flow oscillator went negative for about four weeks in March and April, it quickly turned very positive, very fast, and since then it’s stayed positive, indicating that institutional buyers keep buying. When the market sold off last week over the whole Comey Russia Trump thing, Take-Two seemed to lose its momentum.
But Lang says the recent sideways move set up a bullish flag pattern, and today the stock broke out above the flag, which typically signals that it’s got more room to run. Take-Two has now blown past its old highs, and Lang thinks it could easily make it up to $85, up $13 from where it’s currently trading.
Video game names are hot, but in the short-term, the strength of these stocks depends on the willingness of money managers to keep buying them, Cramer said. The charts, as interpreted by Bob Lang, suggest that all three of the pure-play video game companies have more room to run
