To The Moon

Meme-Stock Darling GameStop Is -25% YTD. What Its Chart Shows Ahead of Earnings

One-time meme-stock darling $GameStop(GME)$   has fallen more than 25% year to date and trails the $S&P 500(.SPX)$   in almost every time period from one month to five years. What does GME's chart and fundamental analysis say as the video-game/collectibles retailer prepares to report earnings next week?

GameStop's Fundamental Analysis

GME will go to the tape with the firm's fiscal Q3 results after the close of business next Tuesday.

The company isn't well covered by analysts, but the one estimate that I can find calls for $0.20 in adjusted earnings per share on roughly $987.3 million of revenue.

Numbers like that would compare very well to the same period a year ago, with adjusted EPS up 233.3% from the $0.06 that GME reported in fiscal Q3 2024 and revenues some 15% higher from the year-ago quarter's $860.3 million.

The firm is also coming off a strong fiscal Q2, where it easily beat expectations for both earnings and revenue. 

GameStop's Technical Analysis

Now let's take a look at GME's chart going back some seven months and running through Tuesday afternoon:

What we have here is a falling-wedge pattern of bullish reversal, as marked with the two blue, heavy diagonal lines that take up almost the entire chart.

Now, this matters, as an ascending triangle – marked above with thinner blue lines, and which this chart comes close to actually showing – would be a pattern of bearish continuance.

GameStop rebounded off of the falling wedge's lower trendline in late November and is currently trying to retake its 50-day Simple Moving Average (or "SMA," marked with a curvy blue line in the tan-shaded area's center). Doing that could get some professional money behind the stock.

That's key, as the shares have recently taken and held their 21-day Exponential Moving Average (or "EMA," denoted by the curvy green line above). Taking and holding the 21-day EMA implies some support from the swing crowd.

One could see the 50-day SMA as GameStop's current upside pivot, but my feeling is that the 200-day SMA (the red line above) will matter much, much more.

Yes, the 200-day line is usually seen as more important than the 50-day one – but in this case, that red line is running almost concurrently with the falling wedge's upper trendline.

Meanwhile, GME's other technical indicators are showing signs of improvement as well.

For instance, we will see that the stock's Relative Strength Index (or "RSI," marked with a gray line at the chart's top) has quickly gone from technically oversold to neutral to much better than neutral in less than two weeks.

And look at GME's Moving Average Convergence Divergence indicator, marked with black and gold lines and blue bars at the chart's bottom.

The 12-day EMA (the black line) and 26-day EMA (the gold line) are both running below the zero-bound, but the 12-day line has crossed over the 26-day one. That's a subtle technical positive.

More overtly, the histogram of the 9-day EMA the (blue bars) has already moved above zero, which is a short-term bullish technical signal. 

An Options Option

Some options investors looking to take advantage of this moderately bullish set-up while not using much capital might set a three-part options trade, called a "combination" in this situation.

This would involve selling a lower put, buying a call and selling a higher call – with all three expiring on the same day but having different strike prices. Here's an example:

-- Purchase one GME call at a $24.50 strike price -- the falling wedge's upper trendline -- and a Dec. 12 expiration (i.e., after Tuesday's earnings). This would cost about $0.70 at recent prices.

-- Sell one GME Dec. 12 $27 call for roughly $0.32 at recent levels.

-- Sell one GME Dec. 12 $20 put, which was trading at about $0.22 as I wrote this.

Net Debit: $0.16.

In this case, the trader wants to get long the shares, but only if GME breaks out of the falling-wedge pattern.

To do so inexpensively, the trader buys a call with a strike price equal to the pattern's upper trendline. But to reduce costs, the trader also sells a put with the $27 strike, turning this portion of the set-up into a simple bull-call spread.

Additionally, the trader sells a put with a strike price that's at the falling wedge's lower trendline to further lower costs (because he or she is OK with actually buying the shares at a discount if this put is exercised).

Best case, the trader's theoretical maximum gain is $2.50 on a set up that only cost $0.16 -- a $2.34 net profit. 

Worst case, the trader ends up long 100 GME shares at a $20.16 net basis at a time when the shares are trading below $20.

Disclaimer: The information provided is NOT financial advice. I am not a financial adviser, accountant or the like. This information is purely from my own due diligence and an expression of my thoughts, my opinions based on my personal experiences, and the way I transact.

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