Shares of GameStop Corp. (GME) were crushed on Wednesday on continued earnings warnings. The video game, consumer electronics, and wireless services retailer with more than 7,000 locations is struggling for survival. GameStop stock traded below $5 per share, which will become a problem it sustained. This is a likely scenario as the company scrapped its dividend so it can pay down debt.
If the stock sustains a decline below $5 per share, its ability to survive will become an issue, as investors owning the stock on margin will then become forced sellers by most securities firms. At issue is that most video gamers are shifting to playing games that are available digitally online, and game consoles are becoming collectors' items.
GameStop stock closed Wednesday, June 5, at $5.04, down 60.1% year to date and down by a serious bear market decline of 70.2% from its Jan. 18 high of $16.90. The 2019 low of $4.71 was set on June 5.
The daily chart for GameStop
GameStop stock gapped below its 50-day and 200-day simple moving averages on Jan. 29, which was a huge warning that the stock has not been above to recover from. Wednesday's gap lower saw the stock trade as low as $4.71 on June 5 without a value level. The stock is below all risky levels. The monthly, quarterly, and semiannual risky levels are $6.48, $7.59, and $11.14, respectively.
The weekly chart for GameStop
The weekly chart for GameStop is negative but oversold, with the stock below its five-week modified moving average of $8.02. The stock is well below its 200-week simple moving average, or "reversion to the mean," at $22.03. The 12 x 3 x 3 weekly slow stochastic reading is projected to slip to 6.45 this week, down from 7.27 on May 31 and below the oversold threshold of 80.00. The reading below 10.00 is an indication that the stock is "too cheap to ignore."
Trading strategy: There are no value levels at which to buy GameStop shares on weakness. Sell shares on strength to the monthly and quarterly pivots at $6.48 and $7.59, respectively.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of each month. The quarterly level was changed at the end of March.
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.