Two weeks ago, it looked like it was game over for GameStop Corp. (NYSE: GME). On March 14th, the popular meme stock sunk to a new 52-week low of $77.58, dragged lower by broad market weakness and continued disdain for the former $400+ high-flier.
On Friday, shares of the video game retailer closed higher for the ninth straight day. Suddenly, like a World of Warcraft character, GameStop has spawned a new life.
The now $151.95 stock’s double off the bottom has been accompanied by heavy trading volume the likes of which we haven’t seen since the early 2021 fireworks. Is it simply another case of investor FOMO or could this be the start of another epic meme stock rally?
Why is GameStop Stock Up?
GameStop has the wind at its back thanks to a general market uptrend buoyed by a collective sigh of relief around the Fed’s first interest rate hike since 2018. Despite the Russia-Ukraine conflict raging on, a building ‘buy-the-dip’ mentality has fueled a pronounced bounce in some of the hardest hit names—including several meme plays.
But there’s more to the story. Much of the climb seems to be at the hands of short sellers who are cashing in on their bearish bets by buying back GameStop shares. There may be more where that came from considering short interest still represents approximately 20% of the float. Many that are still holding short positions may be feeling the pressure to buy in fear of another moonshot spike.
GameStop’s nine-day winning streak also relates to the company’s March 17th fourth quarter earnings release. Although the 6% top line growth was nothing to get excited about, management helped stoke the fire by giving a bright 2022 outlook tied to its newfound NFT Marketplace ambitions and plans to evolve into a one-stop modern technology shop rather than a simple media retailer.
Finally, the stock has also received some major support in the form of insider buying. Board Chairman Ryan Cohen recently disclosed a $10.2 million purchase of GameStop stock which brought this stake in the company to more than 9.1 million shares, or roughly 12% of shares outstanding. Traders get enthused when a closely followed insider buys—and with GameStop they get downright giddy.
What Do the Technicals Say About GameStop Stock?
The March 22nd move was a big one. GameStop regained its 50-day moving average for the first time since November. A long green candlestick with a tiny wick wrapped up a day during which bulls were in full control. The follow-through day of March 23rd was even more convincing. The stock jumped in 7.5x the average daily volume setting the stage for a continued uptrend to close the week.
Not surprisingly, GameStop’s vertical short-term trajectory has caused overbought conditions to set in according to several technical indicators. On the daily chart, the relative strength indicator (RSI) is at 75, the highest it has been since August 2021. The stock is peeking above the upper Bollinger band which also suggests things may be stretched and a correction imminent. Moves outside the upper band have historically foretold downturns.
With this said, short-term resistance is not far away at $155. If GameStop can make another high volume move past this level, the exuberance could last a lot longer. The next major resistance area would be around $250, meaning another $100 could be ahead.
Also on the bullish side is a double bottom chart pattern that was confirmed on March 23rd. The intermediate term pattern lends credence to a sustained uptrend and a possible run to the $183 to $194 range over the next couple months.
Will GameStop Stock Go Higher?
Right now GameStop’s technicals are sending mixed messages so it’s hard to say where the stock goes from here. As a meme stock heavily influenced by social media-banded retail traders, it seems to have its own set of rules anyway.
We can’t lean on the fundamentals when it comes to GameStop because that’s not what drives the stock. With the company operating at a steep loss and the balance sheet a disaster, it is social media chatter and wild options trading activity that run the GameStop show. This detachment from economic reality is why the ‘investment’ carries a ton of risk that many opt to avoid.
For traders that do like being in the GameStop game, the recent surge does, however, have the markings of something bigger. Well above average trading volume, renewed social media chatter, and a bullish chart pattern point to a sustained rally if not another crazy short-squeeze spike. Granted, it could all come crashing down at any moment, but for now, the risk appears to be to the upside.
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