It’s Game on for GameStop Stock

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Stateside and given recent fun-in-the-sun revelry, many are worried about a punitive fourth wave. But when it comes GameStop (NYSE:GME) and a weakened circus-like environment, is a bullish third wave possible for investors? Let’s look at what’s happening off and on the GME stock price chart. Then, we’ll offer an aligned risk-adjusted determination based on the evidence.

Source: Shutterstock

“Gamestonk!!” Not long ago the brick-and-mortar video retailer captivated Wall and Main Street with rarely, if ever before seen volatility. It put Amazon’s (NASDAQ:AMZN) go-go and “oh no!!” days during the dot-com turned dot-bomb era to shame. More recently, even the 2008-2009 financial crisis or ginormous swings in crypto play Bitcoin (CCC:BTC-USD) the past couple years have been no match for GME shares wild ride in 2021.

With the national news agencies on the story in January and fueled by massive, short interest as bullish retail traders using Reddit’s r/wallstreetbets took larger sophisticated bearish investors to task and to the bank, it was a veritable big-top style show. GME was the ringmaster and heavily-shorted stocks AMC (NYSE:AMC), Koss (NASDAQ:KOSS), Blackberry (NYSE:BB) and others kinda sorta followed along in GameStop’s floppy and sloppy footsteps.

Today is today though. GME shares are no longer the over-the-top short play sporting short interest of nearly 1.4x the stock’s float and responsible for January’s epic 2,700% rally from about $17 to a high of $483 in less than three weeks.

Nor is GME stock even the same beast as it was in late February into March. Over that similar three-week period GameStop shares “enjoyed” a still hefty bearish population in the low 40s percentile range as GME surged 800% from a low of $38.50 to a high approaching $350.

Currently and with the stock’s resident bear population picking up camp and short interest a “measly” 18.70%, GME is not the same thematic meme ride for investors it once was. But that may not matter for a third and perhaps much longer third wave of more sustainable bullish price action. First things first though.

Sale of Stock

Right now GME is grappling with news of the “dreaded” secondary announced Monday. But to steal a line from POTUS, “here’s the deal” about the upwardly-revised $1 billion sale of stock that’s spooking investors. Tapping the capital markets when market conditions permit and for the right reasons is far more important than short-term doom and gloom theatrics bemoaning share dilution. And that appears to be the case in GameStop.

With a management team that includes respected Chewy (NYSE:CHWY) co-founder Ryan Cohen and one already laying out its transitional endgame to become the Amazon of gaming, there’s reason to be upbeat about GameStop. And who knows, maybe fortifying the business pivot as an early adopter of cryptocurrencies and one where tomorrow’s GameStop gamers win Bitcoin as CNBC’s James Cramer mused in late February – the real prize may just be for GME shareholders committed to long-term capital gains in GameStop 2.0.

GME Stock Weekly Price Chart

Source: Charts by TradingView

For investors that like the idea of the long game for GME stock and a successful business turnaround, the weekly price chart is shaping up for a potential third wave of upside and possibly a more sustainable bullish trend. Technically, shares have settled into a two-week inside candlestick consolidation pattern. The relative quiet follows a bullish hammer test of GameStop’s 76% retracement level tied to the stock’s February low to March high.

All told, GME is offering investors a spot to pick up shares at a substantial discount. This is a story which has the capacity to turn into a bonafide growth situation over time. It’s reminiscent of Advanced Micro Devices (NASDAQ:AMD) a couple years back as it made its way back from the brink despite loads of warnings and criticism and into a top-flight semiconductor company.

Today’s “discounted” value in GameStop isn’t perfect of course. Not that anything ever is when it comes to investing. Still, GME’s stochastics are hovering near oversold levels but bearishly misaligned. And right now, there’s no candlestick price confirmation, either.

The rub, of course, in a stock of GME’s caliber is waiting on a bullish signal to emerge. If an investor insists on either or both price action or the secondary indicator to support a buy decision, potential and meaningful stock slippage needs to be accepted as par for the course.

Promising Conditions

Bottom line, the observation is conditions look promising enough for a purchase of GME stock. However, I’d caveat and recommend playing a long position as part of a partially hedged, modified collar strategy. One favored combination of this type is selling the July $300 call and purchasing a July $160/$85 put vertical for partial downside protection.

On the date of publication, Chris Tyler holds, directly or indirectly, positions in listed Bitcoin (GBTC), Advanced Micro Devices (AMD) and its derivatives, but no other securities mentioned in this article.

Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100%  the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.