AMC Entertainment Holdings, Inc (NYSE: AMC) was trading more than 8% lower on Wednesday after skyrocketing 166% higher between March 14 and Tuesday, when the stock printed a temporary top at the $34.33 mark.
The trading range is completely within Tuesday’s range, however, which has caused the AMC to develop an inside bar pattern on the daily chart. An inside bar pattern indicates a period of consolidation and is usually followed by a continuation move in the direction of the current trend.
An inside bar pattern has more validity on larger time frames (four-hour chart or larger). The pattern has a minimum of two candlesticks and consists of a mother bar (the first candlestick in the pattern) followed by one or more subsequent candles. The subsequent candle(s) must be completely inside the range of the mother bar and each is called an "inside bar."
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A double, or triple inside bar can be more powerful than a single inside bar. After the break of an inside bar pattern, traders want to watch for high volume for confirmation the pattern was recognized.
- Bullish traders will want to search for inside bar patterns on stocks that are in an uptrend. Some traders may take a position during the inside bar prior to the break while other aggressive traders will take a position after the break of the pattern.
- For bearish traders, finding an inside bar pattern on a stock that's in a downtrend will be key. Like bullish traders, bears have two options of where to take a position to play the break of the pattern. For bearish traders, the pattern is invalidated if the stock rises above the highest range of the mother candle.
The AMC Chart: AMC reversed course into an uptrend on March 15, with the most recent higher low formed at the $18.86 mark on March 24 and the most recent higher high created on Tuesday at the high-of-day. The stock has since entered into a sideways consolidation pattern on the four-hour chart, which has created an inside bar pattern on the daily chart.
- Traders and investors can watch for a break up or down from Tuesday’s mother bar to gauge future direction but the pattern leans bullish because AMC was trading higher before forming the inside bar.
- The consolidation was taking place on lower-than-average volume, which indicates the pullback isn’t related to fear and is healthy. As of early afternoon, only about 45 million AMC shares had exchanged hands compared to the 10-day average of 96.02 million.
- The pullback is needed to cool down AMC’s relative strength index (RSI), which was measuring in at 86% on Monday and Tuesday. When a stock’s RSI reaches or exceeds the 70% level it becomes overbought, which can be a sell signal for technical traders.
- AMC is trading above the eight-day and 21-day exponential moving averages (EMAs), but the eight-day EMA is trending about 12% below the current share price. The stock will need to trade sideways or retrace slightly lower for a period of time to allow the eight-day EMA to catch up, which may then help to guide the stock higher.
- If AMC breaks bearishly from the inside bar pattern, traders and investors can watch for AMC to possibly set up a bull flag pattern, which would be negated if the stock breaks down below the eight-day EMA. If AMC does form into a bull flag above the eight-day EMA and the pattern is eventually recognized, the measured move could take the stock up toward the $70 level in the future.
- AMC Entertainment has resistance above at $29.45 and $31.81 and support below at $25.79 and $20.36.
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