GameStop: The Meme Days Are Over

May 03, 2022 7:37 AM ETGameStop Corp. (GME)356 Comments

1.46K Followers

Summary

This is a technical analysis approach to GameStop, as all fundamentals went out the door over a year ago.
GameStop's chart exhibits a massive descending triangle, deteriorating levels of support, low volume, and a RSI in free fall.
I am bearish on GameStop and believe prices will fall below $90 per share by the end of FY22.

A concept image consisting of a notebook with the word "HODL" written on it. — Matthew de Lange/iStock via Getty Images

Thesis:

GameStop (NYSE:GME) brought a whole new level of speculative trading to the broader financial markets. The power of social influence and accessibility to brokerages unleashed a new monster known as 'Meme Stocks.' The idea was to buy up shares of heavily shorted companies, forcing short positions to cover, and sending share prices to the 'moon.' This is known as a short squeeze, and it worked quite well for those who went long on GameStop at share prices below $100. However, the meme days appear to be over for GameStop, as market uncertainty is rising, share price is dwindling, and support levels are collapsing. Additionally, volumes are low and the relative strength index (RSI) is entering free fall. If you're looking for a recommendation on shares of GameStop, mine is to sell. I will be taking a technical analysis approach in this analysis, as GameStop's price action has evaded all laws of fundamental, financial analysis.

The technical analysis doesn't look good for GameStop:

Below is a chart of GameStop's candle chart dating back to before its meme-fueled price launch.

GameStop Technical Analysis Chart (Made by Author) (tradingview.com)

The first technical indicator I'll address is the massive descending triangle that GameStop has been forming since January of 2021, when shares reached highs of $483 per share. There were many volatile price swings following, but the overall trend has been down. Per the name, a descending triangle is a bearish pattern, and GameStop's chart is a perfect representation of one. If you look closely, you can identify multiple descending triangles on shorter time frames as well. Long-term and short-term price action are both bearish according to triangular technical patterns.

The second significant bearish indicator is the broken levels of support. The $150.66 per share was a strong level of support for GameStop. It was broken this January and retested in March. However, the month of April demonstrated a rejection of the retest. Looking at the chart, this $150 level acted as a significant level of support for GameStop over the last 15 months. With this level of support broken, there is only one significant level left before things really get messy for GameStop, which is the $91.18 mark. Considering the overall trend of GameStop and the general market, it appears to be a matter of time before shares break the critical support level of $91 per share. If the $91 support level is broken, the next critical level would be around $40 per share. Either way, critical levels of support have been consistently broken, and there's not many left before shares of GameStop are trading below $10 again.

The next indicator is volume, which can be seen as the green and red bars underneath the candle chart. GameStop's volume was extremely high when the short squeeze was in full force. However, since March of 2021 volume has dissipated rapidly with little to no return. Essentially, share prices are slowly deteriorating and there's no positive volume to help prevent it. Share prices have remained elevated by those who are holding on to shares. However, the number of holders is slowly decreasing, as seen by the gradual decay of GameStop's share price. It takes a lot of volume to move the financial mountains that GameStop once did, but that volume is no longer present, and hasn't been for quite some time.

The last bearish indicator is the RSI. While GameStop is not in overbought territory, the RSI has rolled over from the retest of the $150 support level and appears to be in free fall. The drop appears as though it has quite a bit of room left, as 4/5 times the RSI has rolled over from levels above 80 (overbought) it has fallen to levels below 20 (oversold). Each time (except for one) this has happened the high achieved from the recent impulse wave has been erased, with levels falling back to the price before the impulse wave began or below it. This indicates that GameStop shares are headed for levels around $91 per share or lower based on the current trajectory. Keep in mind a break below $91 is a significant bearish indicator.

In short, the technical analysis does not look good for GameStop. The chart has formed a massive descending triangle with several micro descending triangles along the way. Critical levels of support have been broken, with only two levels at $91 and $40 left before shares could retrace to pre-short squeeze prices. There is very little volume, which would be the biggest catalyst for GameStop. Even in recent upswings overall levels of volume have been insignificant. Upon evaluating the RSI, it appears the $91 support level will be broken before it retraces to oversold territory, which it has done nearly 4/5 times after rolling over from overbought territory. Considering fundamentals for GameStop are out the door, I am taking to technical analysis, and the analysis doesn't look good for those who are long on the Godfather of meme stocks.

My prediction on GameStop:

Below is a chart outlining my prediction on GameStop's short-term price movement moving forward.

GME Stock Technical Analysis Price Prediction — Price Action Prediction with Trend Lines (Made by Author) (tradingview.com)

I believe shares are going to break below the $91 support level followed by a retest above the $91 support level. From there I expect the retest above the $91 level to get rejected, sending shares to a channel between $90 and $40 per share. I will not speculate exact levels, as new levels of support will likely be formed within the new trading channel. However, I believe shares are going to break below $91, likely before the end of FY22. This would represent a downside of 25% or more. I have drawn trend lines from the most recent candle outlining the price action I believe will occur.

Conclusion:

In conclusion, I think the meme days for GameStop are generally over. There may be upswings in the interim, but the overall trend for the shares is bearish. Many investors wanted to stick it to Wall Street by short squeezing a highly shorted GameStop. While they succeeded in doing so, they can only make money with a sale. While rebellious mantra can be enticing, profiteering is even more so. I think investors will look to solidify profit, as that is the true objective of any given investment. As investors continue to close trades, GameStop's share price will continue to progressively fall. This can already be seen in the technical analysis with the descending triangles, broken supports, low volumes, and RSI trends. For these reasons I am bearish on GameStop and believe the stock is a sell, especially for those that may still be in the green.

This article was written by

Dalton Hicks

1.46K Followers

My investment analysis is focused on identifying well-established companies trading appreciably under intrinsic value. I believe in deep value, long-term investments. My objective is to generate exceptional returns from well-known, less volatile blue chips. I am a mortgage loan officer, and the head of a limited investment partnership. I hope my contributions and analysis can provide valuable insight to fellow investors.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Summary

Thesis:

The technical analysis doesn't look good for GameStop:

My prediction on GameStop:

Conclusion:

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