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Part I: GME may be headed lower, and that's a good thing.

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*I want to preface this by saying I am currently long GME, holding 500 shares with an average cost basis of $15 opened following the Q2 earnings in September. I plan to continue to greatly expand this position. Please feel free to check my profile for proof, I have posted my purchases.*

The purpose of this post is to share with the community what the absolute low of GME could look like and to prepare shareholders for where shorts are likely targeting to drive price.

A. I want to begin this discussion by saying unfortunately, retail shareholders do not want to discuss further decline in the stock for a variety of reasons. I find this reality frustrating because it prevents an honest discussion and warps expectations of the share price. I will be sharing my thoughts regarding what I believe to be GME's final low prior to future price appreciation.

An ignored reality throughout this saga is that GME's fundamental value throughout 2021 and 2022 simply could not support its elevated share price. The company was consistently losing money, reporting net losses quarter after quarter, and no amount of cash reserves or fairy dust could negate this fact. However, this is no longer the case.

Narrative plays a massive role in stock movement within our financial markets. We can see this play out in nearly every single stock across the entire market. GME's narrative for the last 3 years has been a stock that is facing declining revenues and an inability to turn a profit. Said narrative provided shorts with sentiment to continue to sink the share price while keeping institutional longs away. However, this narrative has begun to change within the last 3 earnings reports. We have seen massive YOY growth in net income and are on the verge, given a good Q3 and Q4, of the first profitable year since 2017. This is a massive development that cannot be understated. This is the turning point for the story of GME.

B. Now I want to discuss why, even though I am as bullish as I have ever been on GME, I anticipate the stock has further decline in its short-term future.

  1. The narrative has not changed yet. As discussed GME is very, very close to becoming a profitable company. However, until GME is consistently posting profitable quarters, the short thesis will still hold water, no matter how many holes there are in it.
  2. Technicals scream lower prices to come. It has been well documented that algorithms have been utilized to systematically drive the price of GME lower. These algorithms utilize technical patterns and specific price levels to achieve an effective downtrend. I will not stand to listen to anyone who claims technicals do not matter on a stock like GME. Short hedge funds use them within algos to drive price down, effectively halting any bullish momentum.

My main point here is that price will not simply turn around. The stock will not magically find its footing in the face of a bearish narrative and weak technicals. Instead, we need to locate what has been absent for years and could contribute to a bull turn: volume. Then the question that needs to be answered is, where will the stock find volume?

C. The image below is a volume profile of GME over its entire 21-year trading history. An issue I have with most performing technical analysis on the stock is they tend to neglect about 17 years of prior price action. Looking to the left of the chart has become more relevant than ever as we return to historical price levels. This volume profile demonstrates the amount of volume traded at specific price levels. The larger the bar, the greater the amount of volume traded at those levels, and as a result the stronger those levels act as demand/supply or support/resistance.

Volume Profile of GME
Volume Profile of GME

What we immediately recognize is that the largest portion of volume traded took place between $5 and $7. This $2 range is an absolutely massive pocket of liquidity, essentially, if price were to enter this range it would find a massive amount of buyers and volume. The red line in the middle of this bar is called the point of control (POC). The POC is the price level in which the most trading volume took place and often times acts as a magnet for price. We can see from 2009 to 2013 the stock was pretty much glued to this level. Once the stock lost the POC in 2017 we saw the accelerated move to the downside. We also can see once the POC was regained at the beginning of 2021, we exploded to the upside. Essentially I believe the POC is the absolute lowest the stock can go and where we will locate massive bullish volume. POC is located at $5.62 which may sound terrifying to many, but we know that as of last earnings, there is $4.15 of equity per share. This would mean if we were to return to the POC, 73% of the stock's total market cap would be PURE EQUITY. Hell of a steal.

Another thing to note about this profile is from $7 up to $11 is an additional block of volume which could also act as support. However, I believe this likely would just result in a short-term bounce and a visit to the POC is likely required to launch GME. However, the stock still could find a bottom somewhere in this range.

The reason why I believe the POC is so important as part of the shorts gameplan is if we take a look at another stock (AMC) that underwent similar price volatility to GME.

Volume Profile of AMC
Volume Profile of AMC

D. This volume profile demonstrates the importance of the POC. Akin to GME, we can see that during trading between 2020 and 2021, when the POC was lost, price accelerated to the downside. When the POC was regained, price accelerated to the upside. In summary, whichever side of the trade volume is on, succeeds.

Zoomed in Volume Profile of AMC
Zoomed in Volume Profile of AMC

The other stock in question (with assistance from piss poor management) was pushed down and below its POC. For almost a year, the stock was pinned to its POC, seeing volatility push it below and above this crucial level. While this was occurring, the stock continued to create lower highs. Eventually, an outside event assisted in the utter destruction of the share price. Once the stock pulled away from the POC, volume exploded.

The key takeaway from this discussion regarding the POC, is that these levels on stocks provide natural liquidity to assist in a move. In the case of AMC, it provided natural liquidity to the downside once additional shares were planned to enter the market.

E. Now that I've finished providing an example on the importance of the POC, and how shorts use it to assist in their trade, I want to provide a concrete time frame on when the POC will be hit. Utilizing the MOAT (mother of all trendlines) that GME has been unable to break above and our POC level, we can view the apex of this trendline and POC level. We will find resolution in the summer of 2025.

MOAT and POC
MOAT and POC

This is not moving the goal posts. This is utilizing available tools to analyze how low the stock can go. I, as an individual investor, know that the fundamentals of the company continue to do nothing but improve. As a result, any decrease in price simply represents an even better buying opportunity.

I will expand in a follow up post why a decrease in share price is such a good thing that I personally am jacked to the tits for.

As for me, I like the stock.

Comments

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On 2023-12-18 admin said:
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I just wanna say that while the analysis is interesting and thought-provoking, I do not necessarily agree with it. I site two reasons.

One, there has been a lot of upward pressure at $12. I'm not saying the price cannot go lower, but... $5.74 is very, very low.

And two, the inversion of the yield curve says that some sh*t will hit the fan in 2024. So I would not skip over that year, to make predictions about 2025. What will happen in 2024?

With that being said, the above writeup is super good and inspiring.