Hype, The Hunger Games and Trading Lions Gate

Nothing against The Hunger Games. But when it comes to upcoming sci-fi blockbusters, the truth of the matter is that I’m holding out for Prometheus, the futuristic, sci-fi thriller directed by the man who brought the world both Alien and Blade Runner.

That said, only a true hater could deny the hype and impressive sense of anticipation that has built up around the opening of the movie, The Hunger Games, distributed by Lions Gate Entertainment (NYSE: LGF) and based on a best-selling, young adult novel by Suzanne Collins.

And this anticipation has been expressed nowhere as powerfully as Lions Gate’s stock price, which has soared over the past three days, gaining more than 20% from its close on Friday.

That Friday close is a relevant starting point for the rally in Lions Gate for a number of reasons. But for traders, the most significant fact about Friday was that it marked the stock’s third consecutive lower close and a pullback not just into short-term oversold territory, but to new, two-week closing lows, as well. And in a stock like LGF that had not given traders or investors many opportunities to climb on aboard, a pullback like this that took the stock to significant new lows and into technically oversold territory was a pullback that could not be ignored.

Recent trading in LGF might have tipped traders off to the potential for a snapback rally during the stock’s most recent, short-term sell-off. Only a week and a half before, shares of LGF began to pull back from what were then the stock’s new, 52-week highs. LGF sold off for three days in a row, entering technically oversold territory on that third consecutive lower close.

The stock rallied for the next four sessions, gaining more than two and a half percent, and finishing just outside of overbought territory and just short of new, two-week highs.

How else might traders have been tippped off to the potential for significant, short-term upside in Lions Gate Entertainment, when the stock again began to pullback just days later? Thursday evening, with the stock down two in a row, we highlighted Lions Gate in our subscription-only newsletter, 7 Stocks You Need to Know, noting that

Trading in a narrowing range since late February, Lions Gate Entertainment has begun to move toward the lower end of the consolidation, finishing in the red for a second consecutive session on Thursday. Any additional selling on Friday almost certainly will return LGF to technically oversold levels.

As we have seen, LGF did trade lower on Friday to become technically oversold, and buyers were soon to follow, arriving on Monday and staying through the the first half of the week to bid the stock higher.

What should traders do now, with the stock having already run significantly? LGF has a negative edge of nearly one and a half percent heading into Thursday’s trading, which suggests that the near-term upside is extremely limited. Add to this a two-point ratings downgrade which took the stock from a “consider avoiding” 3 out of 10, to an even more avoid-worthy, 1 out of 10 – our lowest rating – and you have a stock that is very likely to be available at lower levels after the current appetite for all things Hunger Games is sated.

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David Penn is Editor in Chief of TradingMarkets.com