Short Trader: Bears Get in the Game With Take-Two

The second quarter of 2007 has been a difficult one for video-game publisher Take-Two Interactive Software (TTWO Quote - Cramer on TTWO - Stock Picks).

A failed breakout in the stock ushered in a euphoric phase in price movement, a bearish technical signal. Euphoria is a tape-reading principle defined by an exhaustion point of buyers. This type of action is normally marked by a vertical price move higher combined with a strong volume spike.

The result of this euphoria is usually a sharp downtrend reversal that pushes price back to the former resistance level. In the case of this interactive gaming company, the former resistance level is near $20, right where the stock is currently trading.

The recent behavior of Take-Two's stock price shows a second bearish technical signal as well. Ideally after a breakout there is less volatility that can lead to an uptrend continuation signal. In fact, during last week's very strong action in the overall market, the stock price began forming a descending triangle at support. Descending triangles are typically bearish in nature, and a break of the triangle support confirms a downtrend continuation signal.

Given that the descending triangle has developed during a strong broad-market move higher, this pattern indicates relative weakness. In addition, the stock's lethargy has occurred in a sector that has received positive coverage over the past two months. Being a weak stock in a relatively strong sector is not a positive sign for the share price in the near term. Therefore, there is a higher probability of seeing former support levels under $20 tested in the short term.

The ideal setup for this trade would be an entry at $21.20, with a stop at $23.20. This offers $2 in risk.

The first profit target would be placed at $19.20 to satisfy the 1-to-1 reward/risk ratio. The final profit target would be at $16.

If Take-Two's share price closes under $19.25 without first offering an entry, this trade setup is no longer valid. The stock closed at $19.86 Monday.

Take-Two Interactive Software (TTWO) -- Daily

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