GameStop stock followed through with a 3% rally, which is now approaching heavy resistance levels from September. This usually would not make this a good entry point for a bullish position. It is definitely not shortable either knowing what this stock has done in the past. My trading strategy would be to then buy the dip if it comes. Else, chase the breakout from the September high on a trigger.
For the last three months, GameStop investors have been going in seesaw inside a wide range. Breaking out from either edges may require patience.
The two zones in question are between $168 and $230 per share.
Overall, the action has been bullish starting off from the double bottom late October. The bulls are making progress with higher-lows and attacking the neckline. It has already gone 25%, so it’s long in the tooth as they say.
Management Needs to Step Up
Fundamentally, not much has changed with the stock, and it remains very controversial. The price has been wild even though the profit-and-loss statement continues to worsen.
The business now is 40% smaller than it was in 2014. Gross profit held better but they still lost half the levels from back then. But if you consider how much growth happened in other sectors, GME stock metrics are grossly bad. This is not my opinion, it is actual facts in the dollars and cents figures from the financials.
Nevertheless, those who believe in its long-term success have the right to buy and hold it. Onus is on management to bring them something exciting. Luckily the pandemic disruption gives it cloud cover on the metrics for at least another few months.
They will eventually have to bring some good news to attract new buyers. If there is a saving grace, it is their positive +$123 million cash flow from their own operations. If this changes it could make for a desperate situation simply to exist.
Nevertheless, the business model has to morph to fit the new world. There is one GameStop near me, and the building looks like it’s from 1970. I wonder how they are in business every time I pass it, yet there they are still.
The chart tells an honest story on GME stock. The February spike was extreme, therefore was right to fade. They repeated it twice over into lower levels but those extremes also corrected.
GME Stock Is Brewing a Move
In the last 10 months, GME stock price action has tightened drastically. This means that there is another big move coming, but we don’t know yet in which direction. Whichever line breaks first, the stock will overshoot in that direction.
For example, if the bulls break out from $230 per share, they could strive toward $290. Conversely, if the bears are able to break the support then it’s not likely to hold three digits. Until either of those situations happen, it remains range-bound.
My conclusion today is that I would be willing to trade GME stock but not invest in it. It doesn’t fit what I look for in an investment thesis. There are better fundamental stories to chase, so I don’t feel the need to pursue this one. This should not offend the fans because this is a preference.
I am confident of the chart levels so I would be a willing participant. This is the age where machines controls the bulk of the price action. Therefore, support and resistance levels are almost self-fulfilling prophecies. Those who deny that are sticking their heads in the sand and purposely putting themselves at a disadvantage.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.