Is the squeeze-trade back on for AMC Entertainment (NYSE:AMC) now? AMC stock has seen an explosive move to the upside that’s resulting in sideways consolidation. While the stock is trying to breakout, investors are trying to figure out which way this one will break.
They’re also trying to figure out if AMC has enough gas in the tank to make another burst higher. Keep in mind, AMC stock is still up about 400% over the last four months.
While it’s struggled to gain traction lately, that’s no small gain to scoff at. Still, there’s a question of whether AMC Entertainment has what it takes to continue higher or if it’s set to roll over.
Trading AMC Stock
Earlier this summer, shares exploded higher on one of those 2021 patented “Reddit Rallies.” AMC stock squeezed from $10 in late May to more than $70 in just a few days. Following a bout of volatility, shares tried to rally once more, but found resistance around $60.
AMC embarked on a multi-month correction, trying to work off some its overbought condition. That pullback was like pouring cold water on a hot fire. Investors were looking for the stock to make a potential push to $100, but it never came to fruition. At least not yet.
Shares found support near $30 and the 21-week moving average, and have slowly but surely pushed higher. After a recent dip, AMC stock found $40 as support, followed by the 10-day moving average. The latter continues to guide the share price higher.
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We now have a breakout over $48, as AMC stock contends with $50. As long as AMC can stay above $48 and the 10-day moving average, it’s okay on the long side. Above $50 could put the 61.8% retracement near $56 in play.
If AMC clears $56, the $60 resistance area is in play, followed by the high near $72.50.
On the downside, failure to hold $48 and the 10-day moving average puts the 21-day moving average and $40 on the table. It also saps some of the stock’s bullish momentum.
Reddit Rally
It’s hard to ever rule out a Reddit Rally hitting these short-squeeze candidates. Whether it’s AMC, GameStop (NYSE:GME), BlackBerry (NYSE:BB) or something else. The moves come in a hurry — they’re violent and they’re unpredictable.
For example, in late August GME stock erupted 36.5% at its highs in a single day, while AMC stock jumped 31% at its highs. There was no real or meaningful news to get it started.
GameStop recently reported earnings, and while the stock is trying to work off its decline, I’m not focused on the results. Instead, I’m curious about the rumors floating around between AMC and GameStop working on a potential partnership.
While we don’t know what it would be — or if it will even come to fruition — a partnership between AMC and GameStop could trigger another one of these Reddit Rallies.
Breaking Down AMC Entertainment
AMC Entertainment is seeing a massive rebound in its business as consumers flock back to theaters. As such, analysts expect a 93% rebound in revenue this year. In 2022, estimates also call for a 90% boost in revenue.
If those estimates come to fruition, AMC should do about $4.56 billion in sales next year. However, that would still be shy of the $5.4 billion in sales that AMC did 2018 and 2019. AMC also isn’t forecast to be profitable this year or next.
Do these observations, combined with the fact that AMC stock trades with a $26 billion market capitalization, make AMC overvalued?
Historically, yes.
The stock has never traded for the type of sales multiple it has now. By traditional standards, most investors would also consider AMC stock overvalued.
However, we’re in an era where valuations don’t matter for certain stocks. At least for now. In the case of AMC, I will default to the technicals. For the moment, AMC’s charts remain bullish and I won’t fight that momentum.
However, if investors opt not to trade AMC, I certainly can’t fault them.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
