GameStop Corp. (GME) reports earnings after Tuesday's closing bell, with Wall Street analysts expecting the struggling brick-and-mortar storefront to post a loss of $0.22 per share on $1.34 billion in second quarter revenues. The stock fell more than 35% following June's first quarter confessional after the company missed revenue estimates and issued in-line guidance, and it lost another 33% into August's all-time low at $3.15.

First quarter revenues fell 13.1%, forcing the game and console retailer to dump its quarterly dividend, spooking shareholders who were already worried about a shrinking balance sheet and threat of bankruptcy. Of course, that's a common issue for America's mall occupants these days after losing significant market share to Amazon.com, Inc. (AMZN) and other e-commerce juggernauts.

However, GameStop has a bigger problem than most of its struggling neighbors, with internet speeds reaching levels that permit digital downloads and cloud-based gaming. An all-digital edition of Microsoft Corporation's (MSFT) upcoming Xbox One S will have no optical drive at all, while Sony Corporation's (SNE) new PlayStation 5 will include a drive that supports backward compatibility. However, everyone agrees that the era of physical media is coming to an end, eliminating one of GameStop's primary profit streams.

Game sales statistics sound the alarm for the retailer's future prospects, with 2008 physical media sales of 80% dropping to just 20% in 2017. That number could collapse after the introduction of Alphabet Inc.'s (GOOGL) Stadia cloud-gaming system in the fourth quarter, which has the capacity to stream 4K and high dynamic range (HDR) video at 60 frames per second on a Chrome browser.

GME Long-Term Chart (2002 – 2019)

Long-term chart showing the share price performance of GameStop Corp. (GME)
TradingView.com

The company came public under $10 in February 2002 and broke down from a trading range in December, dropping to $3.75. That marked a low-risk buying opportunity, ahead of a powerful trend advance that continued into 2007's all-time high at $63.77. The stock lost about two-thirds of its value during the 2008 economic collapse, dropping to a two-year low at $16.91 and bouncing weakly into 2009.

It struggled for the next three years, failing to bounce with the broad market, ahead of a successful test at the low in the second half of 2012. Committed buyers then returned in force, but the strong recovery wave failed within six points of the prior high in 2013, posting a lower high within a double top pattern that broke support in the mid-teens in 2017. The channeled downtrend since that time has been brutal, slicing through the 2002 low in August 2019.

The monthly stochastics oscillator crossed into the oversold level in December 2018 and has spent the past eight months posting the most lopsided technical readings in the stock's 17-year public history. The decline has now settled just above the 2002 low, which has nearly aligned with declining channel in place since January 2016. Taken together, this is a perfect set-up for a strong and potentially profitable oversold bounce after earnings.

GME Short-Term Chart (2015 – 2019)

Short-term chart showing the share price performance of GameStop Corp. (GME)
TradingView.com 

The on-balance volume (OBV) accumulation-distribution indicator tested the 2013 high in 2018, indicating heavy bottom fishing, and entered an aggressive distribution phase. It fell through five-year support in May 2019 and accelerated to the downside in lockstep with collapsing price. Buying interest since the August low looks legitimate, but it will take months or years of steady accumulation to ease the extremely bearish technical outlook.

Contrarily speaking, the battered and extreme technicals predict that the stock will gain ground from here, perhaps into the Christmas buying season, and shake out a large supply of short sellers. GameStop has just unveiled a new online sales portal that is attracting interest, and optimism from this initiative could ease sentiment enough to lift the stock into descending channel resistance that's now dropping from $13.

The Bottom Line

GameStop stock is slumping at a 17-year low but could reward bottom fishers after this week's second quarter earnings report.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.