Shares of Electronic Arts (NASDAQ:EA), one of the greatest video game companies, fell to as low as $10.77 in July, 2012. Less than five years ago, it looked like everybody was running as far away as they could from the stock. Yesterday, the last day of January, 2017, Electronic Arts closed at $83.43. In October, 2016, the price even climbed to as high as $86.07. Obviously, people’s attitude towards the company has changed significantly. However, just like the last bear market eventually ended, we believe the current uptrend is not going to last forever, either. So, should we get ready for another decline? The Elliott Wave Principle might help us find the answer to this question.
The theory states that trends move in repetitive patterns, called waves. The chart above shows a five-wave impulse since 2012, which means Electronic Arts’ uptrend is about to continue. Not right away, though, because every impulse is followed by a correction in three waves in the opposite direction. Instead of buying shares in the video gaming giant near all-time highs, we should expect a pullback towards the support area of wave 4 near $50 a share. Additionally, the relative strength index shows a strong bearish divergence between waves 3 and 5, emphasizing heavily on the fact that the bulls are exhausted. Electronic Arts is a great company, producing tons of very exciting games, but its stock is too expensive and vulnerable for our taste. If this the correct count, investors should consider it again in a few years. Not now.