The Gamestop (NYSE:GME) saga has captured the world's attention in the last week, and in the process it appears to have motivated many otherwise smart people to make some really dumb decisions with their money.

Last night, a friend of mine who had recently bought GME above $300 per share was trying to convince me how "this time was different" and this stock was going to "change the world". While one can't argue with someone who is delusional, I did state the following to help illustrate how much the odds were stacked against GME longs at $300+:

  • At its highs GME shares were up 15,000%+ in the last six months.
  • Virtually every single person I have come across in the last week has asked me about Gamestop.
  • Every single media outlet on Planet Earth has been running the Gamestop story in recent days. 
  • Short interest data is two weeks stale so you actually don't know what the current short interest is. 
  • The CEO, other management, and early longs (including Michael Burry) all have huge gains. Don't you think they are selling? (Burry did tweet that he had exited his position in the last couple of weeks)
  • Judging from many of the posts I read from WSB, most GME longs didn't actually have a trade thesis or any risk management plan.  They were just "holding the line" and staying long, until when or for what I'm really not sure. 

This morning, GME shares are back below $100 and the GME daily chart is instructive:

GME (Daily)

Here are my technical chart observations in chronological order:

  • GME displayed evidence of accumulation for months leading up to the recent parabolic rally, as evidenced by a series of higher lows/highs and some big up days which saw above average volume.
  • The short squeeze really began picking up steam when price broke above $50 on January 22nd.
  • The "gamma burn' kicked into overdrive on January 25th as those who had sold call options at strike prices above $100 suddenly scrambled to cover their positions and cap losses. 
  • The trading sessions on January 27th, 28, and 29th were characterized by short seller capitulation and a steady drop-off in trading volume from the extreme volumes of January 22nd, 25th, and 26th. 
  • At its high of $483 on January 28th, GME had reached such an extreme overbought/overbullish condition that it was virtually impossible for the stock to continue moving higher.  At the high on January 28th GME reached a "buying exhaustion" - in nearly 20 years of trading I have never seen the FORCE Index look like the one above on GME and I have never seen options implied volatility like we witnessed in GME last week. 
  • I don't know what the short interest actually was as of last Friday (the 29th) but I would be shocked if it was still above 50% - I make this assessment based upon the price and volume action in the two weeks since the last short interest data was reported on January 15th (122% short as of that date). 
  • Notice how the volume has dropped off considerably in the last several trading days, just as price has begun falling off a cliff. All that has to happen for a stock that has experienced a parabolic blow-off move to decline is for buyers to run out of ammunition and begin pulling back their bids. 

I have no dog in the GME fight. However, I am a student of the market and human behavior. The GME saga is rich in lessons both in terms of technical chart structure and human behavior, as well as the madness of crowds. When GME was on its way up I advised friends who were asking me if they should short it, not to. And when GME has been falling in recent days, I also advised not to buy it either. I view a stock like GME as much too dangerous and volatile of a situation for anyone to trade, let alone a complete newbie. Unfortunately, it appears that many market novices are getting one of their first market lessons in GME.

I would like to remind all of us that just because you read something on the internet doesn't mean it's true. If anything, quite the opposite. 

UPDATE:  A post on "Wall Street On Parade" reveals that GameStop Promoter Keith Gill Was No “Amateur” Trader; He Held Sophisticated Trading Licenses and Worked in the Finance Industry


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