• GameStop shares stage another huge rally on Monday.
  • GME closes near the intraday high, up 12% at $168.93.
  • GME, AMC king meme names, and king rallies on Monday.

Update April 27: After rising as much as 11% in premarket trading, GameStop Corp Inc (NYSE: GME) started the second day of the week sharply higher and touched its strongest level since April 6 at $188. Although GME retreated modestly in the last hours, it’s still up 7% on the day, trading around $180. In the near term, the technical outlook seems to have turned bullish with the price breaking out of the triangle that formed on the daily chart. In the meantime, the S&P 500 Index trades flat on the day near 4,190 as investors stay on the sidelines ahead of the FOMC’s policy meeting. 

GameStop (GME) is still struggling for momentum as retail volume exits the markets for the real world. Volume across all meme favourites – GME, AMC, PLTR, KOSS and others – has dropped. Volatility is also down sharply in these names, though it could not have gotten much higher.

GME shares have been fighting back in an otherwise downtrend and technically still look bearish. The last few sessions have seen price rises run into resistance from the 9 and 21-day moving averages. The Moving Average Convergence Divergence (MACD) indicator also is in a crossover sell signal formation from mid-March.

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GME stock chart

Fundamentally, GME is way overvalued. Many high growth stocks bring high valuations such as Netflix, as investors bet that earnings will grow into the valuation. This strong growth allows earnings multiples to soften, and eventually a successful company does not look so overvalued on a fundamental basis. Again, the ones such as Netflix, that is.

But GameStop is at a much earlier stage. It does not yet have a proven model and instead is aiming to replicate other online retail strategies. The difference is GameStop has formidable competitors in online game sales from vested interests such as Sony (owner of Playstation) and Microsoft (owner of XBox). 

Technically, the picture is still bearish. Each spike high fails lower than the previous one, as evidenced by the downtrend line from the January 28 high. 

The MACD crossed over in mid-March giving a sell signal and it remains in a bearish crossover. The Directional Movement Index (DMI) has also crossed over, giving a sell signal. However, this is not a strong signal as the ADX line is below 25, indicating a weak trend and a weak signal. 

Apart from the indicators, the chart is also painting a bearish picture. Declining volumes and a triangle formation ultimately will lead to a breakout. Usually, breakouts are sharp and triangle breakouts notably so. GME is below the 9 and 21-day moving averages, which are themselves pointing lower. All bearish signs. 

Going short this one can lead to all sorts of troubles as has been well documented. Instead, a bearish position might be best served by purchasing the $140 puts expiring May 7 at a cost of $8.38, thereby limiting your loss in the event of another squeeze. If you take the triangle breakout theory to the letter, then the breakout is the size of the entry, in this case $102. That would give GME a target of $40 on a breakout. So playing more out of the money options of a longer duration might work. The June 18 $70 puts are trading at $2.86.

On the other hand, if GME breaks out of the triangle to the upside, the target would be $264. At present GME is more bearish, but if it breaks the 9 and 21-day moving averages and breaks out of the triangle to the upside, then the picture has changed. Look for confirmation from a MACD crossover and or a DMI crossover.


Previous updates

Update April 27: GameStop Corp Inc (NYSE: GME) has kicked off Tuesday’s trading session with a significant increase of over 6.54% to nearly $180. This is the third consecutive day of increases for the video-gaming company that has attracted retail traders. As described below, technicals favor bulls, with a clear objective in sight. The next moves of Ryan Cohen are closely watched by those interested in fundamentals. 

Update: GME shares roared higher on Monday, breaking out of their triangle formation and closing near the intraday – a bullish sign. GME signed for a near 12% gain to close at $168.93. It was very much risk-on across the meme stock space as all stocks rallied sharply. GME now remains bullish with support at $163.79 and $159.61, the key to the short-term trend. The first target is the high from March 26 of $218.93.

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