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Will AMC's Short Squeeze Continue?

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NYSE:AMC   AMC Entertainment Holdings, Inc
Primary Chart 1 : AMC Price on the Daily Chart with Significant Fibonacci Levels Noted

Will AMC's Short Squeeze Continue?

Another short squeeze has successfully launched a few lucky traders into the stratosphere. Maybe more than a few if some take profits timely. AMC has risen about +183% above its low on May 12, 2022. In the past several days since July 27, 2022, it has risen about 99.06%. All signs point to another short squeeze similar to the prior ones. Even volume patterns look the same—albeit much smaller than prior volume patterns.

The short squeeze could continue as it did in June 2021. Short squeezes don't necessarily stop because everyone things price has gone too high. This article does not take a position on whether AMC is destined to revisit this year's lows or make new all-time lows. And predicting the behavior of numerous market participants—the retail buyers looking for a squeeze and the short sellers looking for a flush—and analyzing how such behavior is affected by other macro issues such as interest rates and liquidity in light of tightening Federal Reserve monetary policy would be a futile endeavor.

As a result, one may look to technical analysis to try to make a prediction about the probabilities.

Note on Primary Chart 1 how the price patterns at the prior short squeeze on March 29, 2022, and today's short squeeze, look nearly identical. Compare the two yellow ellipses on Primary Chart 1 above. Both peak candlesticks have an extremely tall bullish candle preceding them. And both sport a long upper shadow (or wick).

Some technicians call this a Pinocchio candle or bar. This type of price bar shows up when the bar breaks temporarily above a level of resistance and then falls back below it. It also can appear when the bar breaks temporarily below a key support level , and then reclaims that level by the close of the bar. Some basics of Pinocchio bars follow below for those unfamiliar with the term:
  • Martin Pring, a technical expert, writes that these bars "give a false sense of what is really going on." Pinocchio bars tend to create bull or bear traps depending on the direction the long upper shadow points.
  • Upside breakouts, such as here with AMC , lock in unwary longs with a loss by the close of the bar. Shorts similarly get stopped when intraday bars pierce well below support and then whipsaw back above that support by the close.
  • In Martin Pring's books, he further explains that the "false break" that develops is "indicative of exhaustion since the price cannot hold above the strong resistance reflected by the line ."
  • In short, like the character Pinocchio's nose that grows when he lies, the price move beyond the resistance / support ends up being a false move, and the bigger the false move, the bigger the lie.

In summary, the Pinocchio bar with a long upper shadow, especially when viewed along side other similar bars over the past year, imply that price has likely exhausted to the upside for the time being.

Further support for exhaustion is evident. Note how the Fibonacci projection levels have provided strong support and resistance repeatedly since the all-time high in June 2021. Primary Chart 1 labels those levels and points out their operation as strong resistance on multiple occasions.

The last two rally attempts occurred in December 2021 and March 2022. Both these rally attempts failed at the .50 Fibonacci projection (green line shown on Primary Chart 1). For the current rally, the price bars with the long upper shadow pierces the next Fibonacci level of importance in the sequence: the .618 level which lies just below the .50 level. This also supports at least a temporary pullback or consolidation.

Additional evidence supports exhaustion. Note below how AMC's price has now risen to +5 ATR on the daily and its candle has a long upper shadow. Moves to +3 ATR are rarely sustainable for long much less +5ATR. In the chart below, note the location of price relative to the +3 ATR Keltner Channel. The +3 ATR KC is the outermost band on the upper edge of the KC bands.

Supplementary Chart 2.1: AMC's price well above +3 ATR band on the Daily Chart using Keltner Channels

Supplementary Chart 2.2: AMC's price relative to the +5 ATR band on the daily chart using Keltner Channels


Finally, note the declining volume on each successive short squeeze. This suggests that the buying pressure has waned as short squeezes have continued following each major decline.
Supplementary Chart 3.1: AMC's price well above +3 ATR band on the Daily Chart using Keltner Channels


But the persistence of the buyers squeezing the shorts should be recognized as something that is a new force in markets since what occurred in 2021. Price could indeed push higher if enough collective buying force continues in stock and options markets sufficient to overwhelm all supply. Price can do a lot of things no one expects.

But based on technical analysis alone, however, price likely falls lower from here. This author makes no argument that new lows will be reached. It will be important to watch the pullback to answer that question. A reasonable price target would seem to be 16.50 near the . 618 retracement of the rally from the May 12, 2022, low to the August 8, 2022 high.
Comment: Some Fibonacci time analysis that could be important for S&P 500 suggests some sort of turn in the index is near.
Comment: From the peak of the exhaustion candle on Aug. 8, 2022, price collapsed about -24.54%

Now price is rallying back up but found resistance at a Fib retracement level:
This appears to be a retracement of the initial wave down. If price pushes above the .786 R, then it's possible a new high could be formed. But given exhaustion patterns showing on major equity indices, this is less probable than continued downside.
Comment: From the peak of the exhaustion candle, on Aug. 8, 2022, price fell about -24.54%.

Then AMC rallied back near the .618 Fibonacci projection shown in the chart above, but failed just below it. Exhaustion patterns like a long tail -- called a Pinocchio bar in this article -- are *short-term* patterns. The target of 16.50 mentioned may not materialize, and any trade to the short side should use a tight stop if that is possible with a volatile stock like AMC.

The target will be adjusted to $20.50. See chart attached below. Significant downside has already occurred since the exhaustion candle, though it was rapid, happening in less than 2 days. Exhaustion candles do not have predictive power beyond a few days.
The .618 level still remains viable as resistance though. So any *close* above the .618 Fibonacci level at $25.79 invalidates the idea that further downside is the more probable path in the near term.

Supplementary Chart showing more conservative $20.50 downside target from exhaustion candle on Aug. 8, 2022.

Note: The author has no open position on AMC since this was published.
Comment: AMC continues to meet strong resistance at the .618 Fibonacci projection level identified in the main post. That level is at 25.79. If AMC is able to *close* above this level, especially for the week, then further downside should not be anticipated, further upside should be possible until another reversal pattern forms.

In addition, the exhaustion candle (6 bars ago) is now too remote in time to have much continuing predictive effect. As mentioned in a prior update, a -24% decline from the peak of the exhaustion candle may be all that candle has to offer.

The .618 projection level at 25.79, however, remains viable until broken on a close. So far, the only candles breaking it have been rejected back below by the close.
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Trade closed: target reached: Price has now reached and exceeded the downside target of $20.50 (adjusted to $20.50 several days ago in the updates from 16.50). AMC now trades at 19.70.

Price has now fallen –28.8% since the exhaustion candle's peak at the top of the latest short squeeze. It appears that technical "footprints" showed the higher probability path even though significant volatility tended to blur the picture somewhat along the way.
Comment: AMC has now fallen -65% from the peak of its exhaustion candle on August 8, 2022. I'm not sure what caused the gap lower this week from the 18.00 range to the 9.50-10.50 range, but this occurred after two news events broke: (1) bankruptcy of another top cinema chain, and (2) issuance of APE shares as a separate class perhaps diluting equity ownership further.

Thanks for following along with this post. It doesn't always work this well. In this case, the technicals were perhaps more helpful than usual: a eye-catching exhaustion candle, a rapid and volatile move to the 5th ATR (unsustainable), a pattern of declining volume over subsequent squeezes, and pattern of resistance at a series of Fibonacci levels.
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