GameStop Corp. (GME) reported quarterly earnings on Dec.10, and the stock gapped lower on another miss of earnings per share (EPS) estimates. The stock traded above its 200-day simple moving average (SMA) at $6.61 on Dec 9 and traded as low as $5.18 on Dec. 11.

The video game, consumer electronics, and gaming products retailer has been struggling for survival as games move from consoles to the cloud. Beating EPS estimates has been a coin-flip over the past 10 quarters, but the stock has been in recovery mode since trading as low as $3.15 on Aug. 15.

GameStop shares closed Thursday, Dec. 26, at $5.40, down 57.2% year to date and in bear market territory at 68% below the 2019 high of $16.90 set on Jan. 18. The stock is also in bull market territory at 71.4% above its Aug. 15 low of $3.15. GameStop stock has been in crash mode since breaking below its "reversion to the mean" during the week of Nov. 27, 2015, when the 200-week SMA was $35.84.

The stock broke below the threshold of $5 per share on July 11, which caused margin call selling, as most brokerage firms will not allow investors to own stocks trading below $5 per share on margin. The stock then had a ridiculously low P/E ratio of 1.89, according to Macrotrends, at the Aug. 15 low. During the first quarter of 2019, GameStop scrapped its dividend so that it can pay down debt. This made it difficult for the stock rise back above the $5 per share threshold.

The daily chart for GameStop 

Daily chart showing the share price performance of GameStop Corp. (GME)
Refinitiv XENITH

The daily chart for GameStop shows that a "death cross" formed on Dec. 6, 2018, when the 50-day SMA fell below the 200-day SMA to indicate that lower prices would follow. This tracked the stock to its Aug. 15 low of $3.15. The recent failure at the 200-day SMA at $6.61 led to the decline to $5.18 in reaction to the Dec. 10 earnings miss. The stock stabilized around its weekly pivot at $5.63 during Christmas week. Note that, if this recovery continues, a "golden cross" will form in January 2020. This will target a semiannual risky level at $7.94.

The weekly chart for GameStop

Weekly chart showing the share price performance of GameStop Corp. (GME)
Refinitiv XENITH

The weekly chart for GameStop will be upgraded to neutral given a weekly close above its five-week modified moving average of $5.90. The stock is well below its 200-week SMA, or "reversion to the mean," at $17.52.

The 12 x 3 x 3 weekly slow stochastic reading is projected to fall to 64.74 this week, down from 73.82 on Dec. 20. Note that, at the Aug. 15 low of $3.15, this reading was 3.37, well below the 10.00 threshold as a stock that was technically "too cheap to ignore."

Trading strategy: Buy GameStop stock on weakness to its weekly value level at $5.63 and reduce holdings on strength to its semiannual risky level at $7.94.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play. The close at the end of June 2019 established new semiannual levels, and the semiannual level for the second half of 2019 remains in play. The quarterly level changes after the end of each quarter, so the close on Sep. 30 established the level for the fourth quarter. The close on Nov. 29 established the monthly level for December.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.