Game Stop (GME) was downgraded Wednesday by the Street.com's quantitative service. Add in a weakening chart picture and indicators, and the combination could mean that Game Stop may not stop at key support. What are the risks?
In this daily chart of GME, above, we can see the support in the $26-$24 area in January and February and again in June and July. Prices bounced higher from these two tests, but the third time traders might not be so lucky.
Prices are below the declining 200-day moving average line and below the still rising 50-day average. The On-Balance-Volume (OBV) line is pointed down the past few weeks, telling us that selling pressure was increasing, with more volume being traded on days when GME closed lower. In the lower panel is the 12-day momentum study and there is no bullish divergence between the price action and the study.
Let's back up a little and look at a weekly chart. In this five-year weekly chart of GME, above, we can see both the two times that GME held around the $25 level in 2016 and the last time it traded there -- 2012. The older a support area is, the less reliable it is. GME is trading below the declining 40-week moving average line, so I would consider the longer-term trend of GME to be down.
The OBV line on this timeframe is pointed down, telling us that sellers of GME are more aggressive. The weekly Moving Average Convergence Divergence (MACD) oscillator is below the zero line (meaning it has a negative trend) and poised to cross over to a new sell signal.
Bottom line: GME is likely to be on the defensive in the short-run. If support around $25 does not materialize and prices close below the support zone, we are likely to see GME decline further to around $20.