GameStop (GME) - Get Report reports quarterly earnings after the close on Tues., Sept. 10 in recovery mode up 36.8% since trading as low as $3.15 on Aug. 15. The video game, consumer electronics and gaming products retailer has been struggling for survival as games move from consoles to the cloud. Beating earnings-per-share estimates has been a coin-flip over the past four quarters. Recent strength is caused by short covering, so be patient. Buy weakness to the 50-day simple moving average at $4.19 and its quarterly value level at $3.90 and book profits on strength to its semiannual risky level at $7.94.

The stock closed last week at $4.31 down 65.8% year to date and in bear market territory 74.5% below its 2019 high of $16.90 set on Jan. 18. The stock was a high-flyer setting its all-time intraday high of $63.77 in December 2007 and set a secondary high of $57.74 in November 2013. GameStop has been in crash mode since breaking below its "reversion to the mean" during the week of Nov. 27, 2015 with the 200-week simple moving average at $35.84.

The stock broke below the $5 a share threshold on July 11, which caused margin call selling as most brokerage firms will not allow investors to own stocks trading below $5 a share on margin. The stock has a ridiculously low P/E ratio of 1.89, according to Macrotrends. During the first quarter, the company scrapped its dividend so it can pay down debt. Given this analysis, it may be tough for the stock to trend back above $5 per share.

Analysts expect GameStop to report a loss between 22 cents and 26 cents per share when it reports after the closing bell on Tues., Sept. 10. Last week Loop Capital lowered its price target to $4 from $7 citing "secular" concerns. A reason for strength since this call is attributed to short covering.

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The Daily Chart for GameStop

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Courtesy of Refinitiv XENITH

The daily chart for GameStop gapped below its 50-day and 200-day simple moving averages on Jan. 29, which was a huge warning that the stock would not recover from a "death cross" that formed on Dec. 6. A "death cross" occurs when the 50-day SMA falls below the 200-day SMA and indicates that lower prices lie ahead. The price gap lower on June 5 was caused by a negative reaction to earnings reported after the close on June 4. Based upon the close of $5.47 on June 28, my proprietary analytics shows a quarterly pivot at $3.90 with its semiannual risky level at $7.94. I show a value level for this week at $2.93 vs. the all-time intraday low of $3.15 set on Aug. 15. The stock is above its 50-day SMA at $4.19 and well below its 200-day SMA at $9.05.

The Weekly Chart for GameStop

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Courtesy of Refinitiv XENITH

The weekly chart for GameStop is positive with the stock above its five-week modified moving average of $4.83. The stock is well below its 200-week simple moving average or "reversion to the mean" at $19.30. The 12x3x3 weekly slow stochastic reading is projected to rise to 25.18 this week up from 14.38 on Sept. 6, above the oversold threshold of 20.00. At the Aug. 15 low of $3.15, this reading was 3.37 well below the 10.00 threshold as a stock that is technically "too cheap to ignore."

Trading Strategy: Buy weakness to its 50-day SMA and quarterly value level at $4.19 and $3.90, respectively, and reduce holdings on strength to its semiannual risky level at $7.94.

How to Use My Value Levels and Risky Levels:

Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, the latest on Aug. 30. The quarterly level was changed at the end of June. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in now.

To capture share price volatility, investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to Use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.