Why The GameStop Chart Looks Bullish Following 4-1 Split Announcement

GameStop Corporation GME closed Friday's trading session down almost 5% after a big bullish day on Thursday caused the stock to close up 15%.

The sharp rally on Thursday was a result of the gaming retailer announcing a 4-1 stock split, which is scheduled to take place on July 21.

The slightly lower prices on Friday may have been the result of a report GameStop’s CFO, Mike Recupero, has left the company and a string of layoffs are planned. 

Friday's lowest price didn't fall under Thursday's low-of-day, however, which caused GameStop to print an inside bar pattern on the daily chart. An inside bar pattern indicates a period of consolidation and is usually followed by a continuation move in the direction of the trend.

An inside bar pattern has more validity on larger time frames (four-hour chart or larger). The pattern has a minimum of two candlesticks and consists of a mother bar (the first candlestick in the pattern) followed by one or more subsequent candles. The subsequent candle(s) must be completely inside the range of the mother bar and each is called an "inside bar."

A double or triple inside bar can be more powerful than a single inside bar. After the break of an inside bar pattern, traders want to watch for high volume for confirmation the pattern was recognized.

• Bullish traders will want to search for inside bar patterns on stocks that are in an uptrend. Some traders may take a position during the inside bar prior to the break while other aggressive traders will take a position after the break of the pattern.
• For bearish traders, finding an inside bar pattern on a stock that's in a downtrend will be key. Like bullish traders, bears have two options of where to take a position to play the break of the pattern. For bearish traders, the pattern is invalidated if the stock rises above the highest range of the mother candle.

Want direct analysis? Find me in the BZ Pro lounge! Click here for a free trial.

The GameStop Chart: GameStop's inside bar leans bullish because the stock was trading higher before forming the pattern. Traders can watch for a break up or down from Thursday's mother bar to take place on higher-than-average volume to gauge the future direction.

• GameStop has been trading in a horizontal pattern since May 26, whipsawing between $113 and $153. If GameStop is able to break up bullishly from Thursday’s mother bar and gain enough momentum to trade up above the 200-day simple moving average, the stock could break up from the horizontal pattern, which could indicate a longer-term uptrend is on the horizon.
• On Friday, GameStop tested the eight-day and 21-day exponential moving averages (EMAs) as support and held above the area, which is bullish. If the stock is able to remain trading above both moving averages on Monday, the eight-day EMA will cross above the 21-day, which would give bullish traders more confidence going forward.
• GameStop has resistance above at $129.50 and $145.22 and support below at $116.90 and $99.97.

See Also: Wen Pounce? AMC Entertainment CEO Hints At Crushing Short Sellers: Here's When The Squeeze Could Be On