GameStop (GME) shares were getting hit on Wednesday, down about 20%.
The recent decline only adds to the pain investors have been experiencing lately. The stock is currently working on its fifth straight daily decline and seventh decline in the last eight sessions.
The one day it rallied in that stretch GameStop gained just 0.8%. The latest catalyst in the decline was earnings.
While same-store sales grew and e-commerce sales almost tripled, GameStop missed on earnings and revenue expectations.
Further, the company could really test the Reddit crowd now, as it said it may look to raise capital. After such a surge in the stock price it seems crazy to think GameStop wouldn’t raise capital, exactly as AMC Entertainment (AMC) did a few months ago.
That’s particularly true after the company’s recent move to help expand its e-commerce reach.
So far the results have resulted in at least one downgrade, with Wedbush analyst Michael Pachter cutting GameStop shares to the equivalent of a sell rating due to their valuation. He also assigned a $16 price target.
Let’s look at the charts.
Let’s be quite clear about GameStop: This is a speculative stock. The business does not justify the valuation or the stock price. It’s more a function of market mechanics (i.e. the stock float vs. its short interest) rather than the stock price being a reflection of the business.
That said, investors who understand this stock as a speculative holding and position their trading size appropriately can attempt to use the technicals in their favor.
With Wednesday’s gap-down open, GameStop stock opened below recent support between $170 and $185, as well as the 21-day moving average.
However, the 10-week and 50-day moving averages are coming into play. Should these levels provide a bounce, let’s see if GameStop can trade back into the $170 to $185 zone and if so, let’s see if that area accepts or rejects the stock.
Above $185 could put $200-plus in play.
On the downside, a move below the 50-day moving average puts the $100 level in play, followed by the 21-week moving average.
Remember, this name is incredibly volatile and that volatility is being reflected in everything from its wide trading ranges to the options prices.
Aggressive bulls may consider picking at some of these dips and seeing if the stock can get a rotation going. Otherwise, more cautious or risk-averse traders should simply avoid this name — there are many others to choose from.
As for selling GameStop? I can't bring myself to think of this stock as a short, even if its fundamentals seem to suggest it. The risk is simply too great to short right now.