When you’re investing, it’s important to pay attention to the underlying game being played between the bulls and the bears. That’s particularly true when it comes to meme stock favorite GameStop (NYSE:GME). With the clock ticking in GME stock, it’s time to call the game in favor of the bears.
But first, before I dive into a deep explanation for how to deal with today’s mayhem in GameStop stock, here’s a bit of a history lesson.
The Story Behind GME Stock Has Shifted
Long gone are the days of “Gamestonk!!” and tweets from Tesla (NASDAQ:TSLA) CEO Elon Musk during the height of the short-squeeze trading scheme that made GME notorious in 2021.
For a while, it wasn’t looking like an issue for Reddit’s GME loving apes. Left to its own devices, GameStop used its celebrity to rid itself of debt via well-placed secondaries.
Adding to the chaos, Chewy’s (NYSE:CHWY) former CEO Ryan Cohen took the helm to pivot GameStop toward a bold new e-commerce business strategy.
It’s the kind of move that could leave bulls with the last laugh. But, today, there’s an increasing chance that GameStop’s vastly diminished (but still significant) bear population of around 16% will take control of the game in GME stock.
The $13 billion, meme stock has obvious challenges ahead of it. Consider for example, the “apes” behind it (remember, they’re not known for their patience) and management’s failure to reveal a detailed roadmap toward growth and profitability.
Moreover, as InvestorPlace’s Will Ashworth points out, after this past month’s broader market correction, there are simply too many other stocks to buy with better prospects.
You may not agree with Will or be worried over GameStop’s dizzying free cash flow multiple. And I get it. There are widows and orphans — apes and everyone in-between — when it comes to buying stocks, right?
Still, most all investors should accept the price chart in GME stock as a warning that today’s bullishly popular mentions, tweets, gifs and other such nonsense are bound to look far less glamourous soon enough.
GameStop’s Weekly Chart Tells the Tale
Source: Charts by TradingView
Looking at the monthly price chart of GME stock, it’s fair to say that it’s not the end of the world. Investors are not staring bankruptcy in the face. In fact, GameStop bulls are safe from both for the foreseeable future.
But the problem today lies in the increasing odds of GME rallying strongly versus an equally significant price drop. It’s time for GameStop’s investors to plan for the possibility of that kind of fallout.
This past month’s failing price action has compelled me to leave the optimism at the door for the first time since GME’s January’s absurdly bullish reaction. While it’s not nearly as theatrical, October has narrowly confirmed September’s failure to clear trendline resistance following August’s bullish pivot candlestick.
In conjunction with a retreat back multiple Fibonacci levels within GME’s base, as well as a bearishly widening stochastics in neutral territory, it’s simply not looking good for investors.
Again, the bulls may have the last laugh. But right now, and in the coming months, I suspect there could be significant pain for those shareholders. I’d go so far as to say that bearish testing toward February’s lows is possible before the laughter might begin again.
As such, I’d strongly recommend watching from the sidelines before making a move in GameStop.
But for GME bulls that simply have to be in it at all costs, an actively managed collar — but one not used too quickly to accumulate GameStop shares — is how I’d approach this meme stock and (hopefully) see it through as a longer-term win.
On the date of publication, Chris Tyler did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.