The stock market closed in strong fashion last week. This comes after seven straight red ones, so investors welcome the relief. This does not, however, indicate that the correction is over. It is just one good step in the right direction. While the S&P 500 was up +2.5%, GameStop (NYSE:GME) stock was almost three times stronger.
GME stock is back to its old ways of dropping jaws on Wall Street. This is not a good thing because it creates potential havoc for retail investors. In fact, billionaire hedge funds have lost their businesses trying to fight that action. Yet, they keep trying and create these massive short squeezes. One would think that eventually they would learn their lesson and stay away from it all together. This, indeed, is my conclusion as the best course of action, especially going into an earnings report.
Generally speaking, the knee-jerk reaction to an earnings report is more about human expectations than a scorecard. Otherwise, every reaction to Apple’s (NASDAQ:AAPL) earnings reports would be positive. Yet, they have only had one positive reaction in seven quarters. Investors should accept that fact to save themselves a lot of potential heartache.
GME Stock Earnings Risk Is at Another Level
GME stock rallied almost 70% in three days last week. If you go back a week further, the rally is 90%. These are astonishing numbers, especially since there was no catalyst for it. From their unofficial headquarters on Reddit, the trading apes are still in charge.
I pride myself on having strong charting skills, but these wild moves put me at a disadvantage. I don’t spend much time on Reddit, so I shouldn’t even mess with the stock. At some point, the U.S. Securities and Exchange Commission (SEC) will have to address this phenomenon. Until then, I am a spectator.
GME stock is now going into its earnings report this week with a ton of momentum. This makes the job of rallying even further tougher under normal circumstances. However, this isn’t an opportunity to short it. My goal today is to scare retail investors from “investing” into that event. I make a distinction between that and “trading” the event. Risking a little bit of money on a speculative bet is totally okay. Taking a full investment position is not because it involves accepting extreme risks.
Technically, GME stock has consistently spiked “to the moon,” but given it up. What it hasn’t done is maintain them on a monthly level. That’s why I am sharing an unusual style chart that delivers my message. These gains are too fleeting for the slower general trading public. Since I am not a glutton for punishment, I resist the itch to short it. I have done it in the past, but only through options, where the risk is finite. I have also traded on the positive side just as well.
But this week is about to get bumpier than usual because of the earnings report. I consider the outcome as having coin flip odds. Options would be the only way I would trade it because that way, experts can game the differential in implied volatility.
The GameStop Story Has to Change
Judging by the last three month’s chart candles, I would place resistance zones around $153 and above $208 per share. Investors should avoid chasing GME stock into these zones because they will face sellers. When the rally was even stronger last March, the sellers rejected $190 harshly. Coincidentally, the bulls lost that neckline last December. This is an interesting lower-high trend to monitor this year.
The fundamentals have not mattered much to the stock price action for a while. If it did, GME would be falling to track its business progress. This is a verifiable fact from the financial reports that they publish with the SEC. Sales have declined since 2015 and as a result, they are now 34% below that mark. These are not statistics to celebrate by spiking the stock price to high heaven.
Moreover, last year, management created a negative half a billion dollar cash flow from operations. In an environment where rates are rising, this could be problem. Issuing more debt to operate is difficult under the rule of a hawkish U.S. Federal Reserve.
At the very best, the financials are not a reason to own the stock. At the very worst, they hide a weakening situation that could blow up in investors’ faces. For now, it is an extremely volatile trading opportunity for those who can handle it. Most retail investors should avoid it and watch from the sidelines. Active traders, on the other hand, can have at it with a helmet and a neck brace.
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.