AMC Entertainment Plunges Following Reverse Split Proposal: Here's What To Watch For

Zinger Key Points
  • AMC reached a new 52-week low on Thursday after announcing financing and a possible 1-for-10 reverse stock split.
  • The stock is trading in a confirmed downtrend, making a series of lower highs and lower lows.

AMC Entertainment Holdings, Inc AMC gapped down a whopping 22% to start Thursday’s trading session after announcing an equity capital raise and a debt for equity exchange.

The company also proposed a vote to convert AMC Preferred Equity Units APE into common shares and enact a reverse stock split, causing APE to soar over 100% at one point.

If the proposed 1-for-10 reverse stock split is voted on and approved, AMC’s common stock will be reduced from about 517 million shares to 51 million shares outstanding. The greatly reduced float could tip the scale of supply versus demand in favor of investors.

Reverse stock splits aren’t usually a good sign, however. A reverse split can be a sign that a company is struggling financially and for AMC, investors know this to be the case. AMC’s financial situation has weighed heavily on the stock this year, causing it to plunge about 75% from the Jan. 3 opening price of 16.84 to reach a new 52-week low of $4.11 on Thursday.

From a technical analysis standpoint, AMC is likely to bounce over the coming trading days because the plummet on Thursday caused the stock’s relative strength index (RSI) to fall into oversold territory.

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The AMC Chart: When AMC gapped down on Thursday, bulls came in and bought the dip, which caused the stock to surge up to almost completely fill the gap before it ran into sellers who knocked it down about 7% off the high-of-day. By early afternoon, AMC was settling near the $4.50 mark after a high level of early-day volatility.

  • If AMC closes the trading session with a significant upper wick, the stock will print an inverted hammer candlestick, which could indicate higher prices will come on Friday. The second most likely scenario is that AMC trades sideways to consolidate the sharply lower price on Thursday.
  • A bounce is also likely because AMC’s RSI is measuring in at about 30%. When a stock’s RSI reaches or nears that level it can become a buy signal for technical traders, although RSI levels can remain extended for long periods of time.
  • AMC is trading in a confirmed downtrend, with the most recent lower high printed on Wednesday at $5.37 and the most recent confirmed lower low formed at the $4.74 mark the day prior. If AMC bounces higher on Friday, Thursday’s low-of-day will be the next lower low within the pattern.
  • Bullish traders want to see AMC surge up above $5.40 to print a higher high to negate the downtrend, or for the stock to eventually print a higher low above Thursday’s low-of-day.
  • AMC has resistance above at $5.23 and $6.33 and support below at $4.31 and $3.56.

Image via Shutterstock

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