Will AMC's Short Squeeze Continue?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.
