Nintendo’s Holiday Breakdown

By: Wayne Duggan

This year has certainly been a big year for Nintendo Co., Ltd (ADR) (OTCMKTS: NTDOY). Possibly the biggest fad of the entire year was this past summer’s Pokemon GO craze that swept the country by storm. Nintendo tapped into the power of Millennial nostalgia – the original Pokemon franchise was a huge hit back in the 1990s.

Investors snatched up Nintendo shares when they saw their neighborhood parks flooded with Pokemon GO players. Unfortunately, Nintendo only received a small portion of the Pokemon GO profits. After jumping from under $18 to over $38 in a matter of days back in July, Nintendo stock has since come back down to earth.

For the past five months, Nintendo stock has been forming a typically bullish chart pattern. However, it closed the week on a very bearish note.

The Pennant Formation

Nintendo traders may be disappointed with the lack of follow-through on this summer’s major Pokemon GO breakout, but they may be even more disappointed with the most recent development in the chart. Since the July spike up to a 52-week high of $38.25, Nintendo had been forming a common technical chart pattern known as a pennant formation. A pennant is a technical analysis pattern that forms when a stock has both a descending resistance line and an ascending support line. On a stock chart, the convergence of the two lines appears to “pinch” the share price into the shape of a pennant.

Pennant patterns often form during consolidation phases for stocks that are trending in one direction or the other. Despite its pullback from July highs, Nintendo stock is certainly in an uptrend in 2016, up more than 55% year-to-date.

The Breakdown

Unfortunately, a high-volume sell-off to close out the week has sent the stock tumbling below its support level. The stock crashed through support at the $29 level, which could indicate a major technical breakdown. The stock immediately dipped to the $25-26 range that represented the highs of the year in 2015.

If negative momentum continues, the next potential support level could be in the $20 range that served as resistance prior to the Pokemon GO spike.

Fundamental Indicator

Technical analysis and fundamental analysis of the stock market are not independent of each other. Often times, technical breakouts are triggered by fundamental changes, and technical changes are precursors to fundamental shifts. For Nintendo, a technical breakdown could be the first indication that the company’s NES Classic system and its Super Mario Run mobile game may not be faring as well in the market as the company had hoped.

Disclosure: the author holds no position in the stocks mentioned.

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