GameStop Stock's Big Move -- and How to Trade It

GameStop (GME) is a mall-based retailer of video games and accessories. The stock is deep in bear market territory after a multiyear intraday high set in November 2013.

Let's look at the daily and weekly charts for this former high-flyer to determine how to trade the stock as shares react to earnings, which are expected after the closing bell on Nov. 22.

Analysts expect GameStop to report quarterly earnings of 47 cents a share. TheStreet's Jim Cramer thinks that traders are giving up on GameStop due to poor mall traffic, as the retailer recently lowered guidance. That forced the stock to trade as low as $20.10 on Nov. 2. Zacks said that GameStop will disappoint investors once again when this earnings reports is released after the closing bell on Tuesday.

Let's see what the charts say.

The daily chart shows that the stock has experienced price gaps lower on prior reduced earnings guidance. Shares of GameStop have been below a "death cross" since Oct. 10, when the 50-day simple moving average declined below the 200-day simple moving average, indicating that lower prices were ahead.

The weekly chart shows a red line through the price bars, marking the key weekly moving average (a five-week modified moving average). The green line is the 200-week simple moving average, the "reversion to the mean."

The study in red along the bottom of the chart is weekly momentum (a 12x3x3 weekly slow stochastic), which scales between 00.00 and 100.00, where readings above 80.00 indicate overbought and readings below 20.00 indicate oversold.

A negative weekly chart shows the stock below its key weekly moving average, with weekly momentum declining below 80.00 in a trend toward 20.00. A positive weekly chart shows the stock above its key weekly moving average, with weekly momentum rising above 20.00 in a trend towards 80.00.

Here's the daily chart for GameStop.

Courtesy of MetaStock Xenith

GameStop closed Monday at $23.46, down 16.3% year to date. It is in bear market territory, 59.4% below its multiyear intraday high of $57.74, set on Nov. 14, 2013. The stock is 16.7% above its Nov. 2 low of $20.10, the day the company warned about earnings to be released after the close today.

The numerous price gaps on the daily chart show the reactions to pre-earnings guidance or to actual earnings results. On Nov. 13, 2015, the price gap lower was caused by reduced guidance before the earnings report on Nov. 23, 2015. The price gap lower on May 27 was due to a negative reaction to earnings released on May 26.

The stock suffered a "death cross" on Oct. 7, when the 50-day simple moving average crossed below the 200-day simple moving average, indicating that lower prices lie ahead. The close that day was $26.68.

On Nov. 2, the stock gapped lower on reduced guidance for its latest earnings. The price gap was from the level of $23.32, set on Nov. 1. This gap has been filled and the stock is below its 50-day and 200-day simple moving averages of $25.11 and $28.46.

Here's the weekly chart for GameStop.

Courtesy of MetaStock Xenith

The weekly chart for GameStop is negative but oversold, with the stock below its key weekly moving average of $24.23. The stock is well below its 200-week simple moving average at $37.51.

Look at the left side of the chart and note how a bull market momentum run-up began from the 200-week simple moving average during the week of Jan. 11, 2013, when the average was $22.60. Note how this "reversion to the mean" held at $31.97 during the week of Jan. 16, 2015, and the 2015 high of $47.82 was set during the week of Aug. 14, 2015.

The open below the 200-week simple moving average of $35.89 as the week of Dec. 4, 2015, began the latest leg down.

The weekly momentum reading is projected to rise to 19.29 this week, up from 13.15 on Nov. 18. A weekly close above the key weekly moving average of $24.23 would result in a positive weekly chart, pointing to a better holiday for gamers then previously thought.

Investors looking to buy GameStop should do so on weakness to $20.37, which is a key level on technical charts until the end of this week. Investors looking to reduce holdings should consider selling strength to $36.65, which is a key level on technical charts until the end of 2016. The stock is below quarterly and monthly pivots at $24.90 and $25.90, which are key levels to close above this week.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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