AMC Entertainment Holdings, Inc (NYSE:AMC) was trading almost 5% lower on Friday, pressured by the general markets, which saw the S&P 500 plunging over 2% lower.
The stock has been trading in a downtrend since March 29, after soaring 166% higher over the course of just 11 trading days to reach a high of $34.33, where it topped out.
A downtrend occurs when a stock consistently makes a series of lower lows and lower highs on the chart. The lower lows indicate the bears are in control while the intermittent lower highs indicate consolidation periods.
Traders can use moving averages to help identify an uptrend with descending lower timeframe moving averages (such as the eight-day or 21-day exponential moving averages), indicating the stock is in a steep shorter-term downtrend, and descending longer-term moving averages (such as the 200-day simple moving average), indicating a long-term downtrend.
A stock often signals when the lower low is in by printing a reversal candlestick such as a doji, bullish engulfing or hammer candlestick. Likewise, the lower high could be signaled when a doji, gravestone or dragonfly candlestick is printed. Moreover, the lower lows and lower highs often take place at resistance and support levels.
In a downtrend the "trend is your friend" until it’s not and in a downtrend, there are ways for both bullish and bearish traders to participate in the stock:
- Bearish traders who are already holding a position in a stock can feel confident the downtrend will continue unless the stock makes a higher high. Traders looking to take a position in a stock trading in a downtrend can usually find the safest entry on the lower high.
- Bullish traders can enter the trade on the lower low and exit on the lower high. These traders can also enter when the downtrend breaks and the stock makes a higher high indicating a reversal into an uptrend may be in the cards.
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The AMC Chart: In its downtrend, AMC printed the most recent lower high at the $18.92 level on April 19 and the most recent confirmed lower low was formed on April 13 at $16.94. On Friday, AMC was trading down toward what will eventually be the next lower low in the pattern and bullish traders looking to enter for a bounce back up can watch for a reversal candlestick to eventually form.
- If AMC closes the trading day near its low-of-day price, it will print a shooting star candlestick, which could indicate lower prices will come again on Monday. If the stock is able to find buyers and close the trading day flat or near the high-of-day, the stock will print a doji candlestick or hammer candlestick, respectively, which could indicate a bounce to the upside is on the horizon.
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- The bounce is likely to come soon because AMC’s relative strength index (RSI) is measuring in at about the 40% level. When a stock’s RSI nears or reaches the 30% level it becomes oversold, which can be a buy signal for technical traders.
- The move lower on Friday was on lower-than-average volume, which indicates the stock may be running out of sellers, which also points toward an imminent bounce. At press time, only about 19 million shares of AMC had exchanged hands compared to the 10-day average of 34.34 million.
- AMC has resistance above at $17.07 and $20.36 and support below at $14.96 and $12.22.
