An ABC Correction For Electronic Arts

06/14/07 08:57:29 AM

by Arthur Hill

Electronics Arts has been trending lower the last seven to eight months, but the decline looks like an ABC correction and the stock is showing signs of firmness.

Security: ERTS
Position: Hold

The weekly chart (Figure 1) shows the ABC correction in Electronic Arts (ERTS). The stock surged to 60 in November 2006 and then embarked on a long correction. The first wave (A) extended below 50, the second wave (B) carried the stock back above 54, and the third wave (C) pushed the stock to new lows for the move. Despite the move to new lows in late May 2007, the stock managed to firm the last few weeks (green oval).

FIGURE 1: ERTS, WEEKLY. Note the ABC corrections in Electronic Arts.

Graphic provided by: Telechart 2007.

In addition to the ABC correction, the decline retraced 62% and formed a falling wedge. Both the pattern and the retracement amount are typical for corrections; 62% stems from the Fibonacci number 0.618, which is also known as the golden mean. The wedge is featured in many books on classical technical analysis. A break above the upper wedge trendline and the high of wave B would fully reverse the downtrend.

FIGURE 2: ERTS, DAILY. There is a clear trendline extending down from the April high and it has been touched three times.

Graphic provided by: Telechart 2007.

With signs of firmness over the last few weeks, let's look at the daily chart (Figure 2) and assess the potential for an earlier signal. There is a clear trendline extending down from the April high, and it has been touched three times, which makes it a valid trendline. The last touch formed the early June high, and this is the level to beat. A move above 50.5 would exceed the trendline and break this high. This would reverse the two-month downtrend and call for a challenge to the April high. I am also watching the moving average convergence/divergence (MACD) for a move into positive territory to turn momentum bullish (green box).

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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An ABC Correction For Electronic Arts

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