Why is Gamestop up 2,000% so far this year?

January 27, 2021 10:00

Shares in Gamestop are now up more than 2,000% this year. And yes - you are reading that correctly. In what has been dubbed one of the greatest short squeezes the stock has attracted attention from famous investors. 

The stock was trading at around $18 at the beginning of the year. On Tuesday the low as $80. After a tweet from the ex-Facebook executive and billionaire Chamath Palihapitiya about buying calls in the stock, it surged towards $150 on the same day. 

The big moves in the video game retailer have been attributed to a retail-driven squeeze. Short interest on the stock was incredibly high, at around 102% of shares outstanding. 

When a band of retail traders from Reddit’s WallStreetBets forum decided to pick up large volumes of out-of-money options it forced brokers to purchase shares to hedge their exposure causing the share price to rise and causing more brokers to purchase more shares to cover their client orders. 

The long-term weekly chart of Gamestop’s share price is shown below:

Source: Admiral Markets MetaTrader 5 Web, #GMT, Weekly - Data range: from Mar 9, 2008 to Jan 26, 2021, performed on Jan 26, 2021, at 8:30 pm GMT. Please note: Past performance is not a reliable indicator of future results. 

 

The chart above shows the long-term downtrend that ensued for much of the past decade. This built up a lot of short interest which has been squeezed out this year as traders dump short positions in what is currently an overall bullish market. 

Source: Admiral Markets MetaTrader 5 Web, #GMT, H1 - Data range: from Jan 7, 2021 to Jan 26, 2021, performed on Jan 26, 2021, at 9:30 pm GMT. Please note: Past performance is not a reliable indicator of future results. 

In the hourly chart above, the price has already accelerated with cycles now becoming much sharper. This is evident from the steepness of the trend lines supporting the price on the way up. While the price is above these levels buyers may stay in control of the market. 

Using technical analysis levels like these can not only help in identifying when to initiate new positions but they can also help in navigating the trade towards the exit. Looking at the overall stock market sentiment can also be useful. 

Currently, the US technology sector is outperforming the others so it’s well worth brushing up on your sector knowledge!

According to BarChart, analysts remain mixed on the long-term outlook of Gamestop’s share price. However, the driver behind the stock price movement is more to do with liquidity and market mechanics than fundamentals regarding the company. 

Source: BarChart, January 26, 2021

 

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