It is no secret that stocks are prone to sudden moves in either direction. This could be triggered by economic data, geopolitical events, stock-specific news, or market sentiment.
Trading such volatile stocks are usually considered a high-risk-high-reward venture. Many traders opt to stay out of the trade rather than risk a loss. However, careful analysis of the charts could help you to enter at the right levels, thereby limiting risk to an extent.
With this in mind, we have started a new weekly series on the trending stock of the week —stocks that are featured heavily in the news.
This week’s stock pick is AMC Entertainment Holdings Inc. (NYSE: AMC), the company that owns, operates, and has interests in theatres.
Why is AMC trending?
AMC Entertainment has been on continued momentum after the company announced last week that it has completed its 43 million shares at-the-market offering and raised $428 million in additional equity capital.
The company also started trending higher from the renewed push on Reddit to squeeze short-sellers. Many retail investors active on Reddit had previously bought up the stock to force short sellers to buy them, as well as to cover their losses, driving the companies’ stock prices even higher.
However, this current spike could be a short-term surge, as the movie theater chain was hammered by a global pandemic resulting in a $4.59 billion loss in 2020 compared to $149 million the year before. Despite the waning pandemic and revived enthusiasm among short-sellers, AMC is also at the risk of being on a secular decline as more and more streaming options are becoming available.
Here’s how to trade AMC right now.
AMC Chart
On analysis of the hourly chart of AMC, the overall trend of the stock seems to be up.
#1 Unbroken Uptrend: The daily chart shows that the stock’s uptrend is unbroken, as it has been forming higher highs and higher lows.
AMC – Chart
#2 Symmetrical Triangle Pattern Breakout: The daily chart shows that the stock has currently broken out of a Symmetrical Triangle pattern which is a possible bullish sign. A symmetrical triangle is a continuation pattern and is characterized by two converging trendlines connecting a series of sequential peaks and troughs. This is marked on the chart as pink color lines.
#3 Price Above MAs: The stock is currently above its 200-day as well as 50-day SMA, indicating that the bulls are presently in control.
#4 Bullish MACD: The daily chart shows that the MACD line (blue color) is currently above the MACD signal line (orange color). This is a possible bullish setup.
#5 Bullish Stoch: The %K line of the stochastic is above the %D line in the chart, indicating possible bullishness.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, the buy level for AMC is near the price of $14.60. This is marked as a green color dotted line in the daily chart.
Important Note: Make sure that you only enter the trade once the daily close is above the recommended price level.
TP: Our target prices are $20 and $25 in the next 3 to 6 months.
SL: To limit risk, place a stop loss at $10.90. Note that the stop loss is on a closing basis.
Target Upside: Our target potential upside is 37% to 71% in the next 3-6 months.
For a risk of $3.70, our first target reward is $5.40 and the second target reward is $10.40. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers 2x to 3x more potential upside than downside.
Risks to Consider: The stock may reverse its overall trend if it breaks down from the symmetrical triangle pattern with high volume. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in the sector.
Recommended Bearish Trade (based on the chart)
In case the stock breaks down with very high volume from the symmetrical triangle pattern and closes below the near-term support area, it could point to an upcoming short-term correction. In that case, below are the entry levels, stop loss levels, and target prices.
Sell Level: You can take short positions on AMC if it closes below the price of around $8.50. This sell level is marked as a red color dotted line in the chart.
Important Note: Make sure that you only enter the trade once the daily close is below the recommended price level.
TP: Our target price is $5.00 in the next 3-6 months.
SL: To limit risk, place a stop loss at $10.30. Note that this stop loss is on a closing basis.
Our target potential downside is 41% in the next 3-6 months.
For a risk of $1.80, our target reward is $3.50. This is a nearly 1:2 risk-reward trade
In other words, this trade offers nearly 2x rewards compared to the risks.
Risks to Consider: The stock may reverse its overall trend if it breaks upwards with high volume. The breakout of the stock could be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.
Happy Trading!
— Trades of the Day Research Team