Is AMC Entertainment Heading For A Huge Swing North Or Will This Bear Pattern Confirm?

Zinger Key Points
  • AMC could be trading in a bull flag pattern or a longer-term cup-and-handle formation.
  • From a bearish perspective, a downtrend could begin if Thursday's price action serves as a lower high.

On Thursday evening, Benzinga asked its followers on Twitter what stock they’re most focused on to end the week. From the replies, Benzinga selected one ticker for technical analysis.

@EverrriseF responded to say they have been focused on AMC Entertainment Holdings, Inc AMC since January 2021.

AMC was trading up more than 3% higher in the premarket on Friday after spending the last three days consolidating and unable to break above the top of the Aug. 8 candlestick. The consolidation is needed because the stock has gained about 134% since mid-June, which has caused AMC’s relative strength index (RSI) to become over-extended.

There are two patterns AMC may be settling into on the daily chart. The first pattern could be a short-term bull flag and the second pattern could be a long-term cup-and-handle formation.

A cup-and-handle pattern can be either a powerful reversal indicator when found at the bottom of a downtrend or a continuation pattern when found in an uptrend.

The pattern is formed when a security forms a rounded trough (cup) and then rises upwards before consolidating downward between two parallel lines (handle). The handle should begin to form before the stock has risen up as high as the top of the left side of the cup.

When the security breaks up through the handle on higher-than-average volume, it indicates the pattern was recognized, and a rally may follow.

  • Aggressive bullish traders may choose to enter a security in a cup-and-handle pattern on the initial rise, with a stop below the lowest price in the cup. More conservative traders may wait to enter a position on a break up from the handle of the pattern on higher-than-average volume.
  • Bearish traders may wait to enter into a position if the security falls below the lowest price within the cup formation, which negates the bullish cup-and-shoulder pattern and indicates an accelerated move to the downside may follow.

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The AMC Chart: Regardless of whether the bull flag pattern or cup-and-handle pattern are recognized by the algorithms, the appearance of the break will be the same. Traders can watch for AMC to break up through the upper descending trendline of the flag/handle pattern on higher-than-average volume to indicate that one of the patterns was recognized.

  • The measured move on break from the bull flag pattern is about 97%, which indicates AMC could eventually trade up toward about $40. If the cup-and-handle is the dominant pattern, the measured move is about 170%, which indicates the stock could soar toward about $75.
  • It should be noted that if AMC to were to reach either of the suggested moves of the patterns, it’s likely to be with many retracements to the downside along the way. Pullbacks on low volume are always healthy. When a stock moves in one direction too quickly, healthy levels of support and resistance aren’t built, which can make the move impossible to sustain.
  • From a bearish perspective, if AMC's high-of-day on Thursday serves as a lower high under the most recent higher high of $27.50, the uptrend  AMC has been trading in since June 14 will be negated. If AMC then prints a lower low over the coming days, a downtrend will confirm.
  • Although AMC’s RSI has cooled slightly, the indicator is still measuring at about 77%. When a stock’s RSI reaches or exceeds the 70% mark, it becomes overbought, which can be a sell signal for technical traders. Of course, the RSI can remain over-extended and under-extended for long periods of time.
  • AMC has resistance above at $25.79 and $29.45 and support below at $20.36 and $17.07.

Photo via Shutterstock. 

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