Is Bullish Momentum Returning To GameStop Stock Or Will The Bears Break This Important Level?

Zinger Key Points
  • GameStop has developed exaggerated bullish divergence on the daily chart.
  • Bullish traders want to see GameStop bust up through $25, while bears need to break the stock down below $24.

GameStop Corp. GME opened just above an important support zone at the $24 mark on Friday, where the bulls continued to defend the level.

The $24 area has been tested eight times since Sept. 7, with the bears unable to break the stock down lower. Meanwhile, GameStop’s relative strength index (RSI) has been slowly rising, which has caused exaggerated bullish divergence to develop.

An exaggerated bullish divergence occurs when a stock makes a series of equal bottoms over a specific timeframe, while the relative strength index (RSI) oscillator makes a series of higher lows. Bullish divergence suggests that the bulls are regaining control and can mark an eventual break up from a sideways trading pattern.

Divergences are best used when combined with other signals and patterns on a stock’s chart because the existence of divergence doesn’t indicate when a possible reversal will occur.

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The GameStop Chart: GameStop started trading in a sideways pattern on Sept. 23, rising up and down between $24 and $28. A sideways pattern indicates consolidation is taking place, which can signal either accumulation or distribution.

  • Because GameStop’s RSI has been rising, accumulation is the most likely scenario. When a stock’s RSI rises, it indicates strength may be returning to the security.
  • On Friday, GameStop attempted to break up through the $25 level but ran into a group of sellers. The volume nodes suggest that historically, there has been a lot of selling action between $25 and $26, which may make the level difficult to regain for the time being.
  • If GameStop is able to break up above $25 over the coming days and bust up through the $28 mark to break above the sideways pattern, the next heavy level of resistance, according to historical volume, is just above $30.
  • If GameStop breaks down from the $24 mark on higher-than-average volume, a downtrend could resume.
  • GameStop has resistance above $28.34 and $32.29 and support below $24.03 and $19.44.

Photo via Shutterstock.

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