AMC Entertainment falls 14% as increasing short bets test a key technical support level

• AMC Entertainment fell as much as 14% on Wednesday as the meme-stock frenzy begins to cool down.
• The stock is testing a key support level at its 50-day moving average in Wednesday trades.
• Short bets against the movie theater chain increased 6% over the past week, according to S3 Partners.
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Shares of AMC Entertainment dropped as much as 14% on Wednesday as retail traders begin to capitulate on the meme-stock frenzy and short bets against the theater chain increase.

The stock tested a key support level on Wednesday, as it traded around its 50-day moving average at $37.28. At time of publication, AMC was trading below the key support level at $35.27.

Moving averages are a lagging trend-following indicator that technical analysts use to smooth out price movements and help identify the direction of the current trend in place.

Traders view the the 50-day moving average, which is the average daily closing price of a stock over its previous 50 trading sessions, as a short-term moving average that often represents areas of support or resistance for a stock.

If AMC manages to decisively hold the 50-day moving average as support, then a rise back to its June peak of about $70 could be in order.

But a single trading day above its 50-day moving average is no sure-signal that AMC stock will continue to trend higher, as declining momentum indicators like the Relative Strength Index suggest fewer buyers are stepping in to support the stock than in previous weeks and months.

Another moving average traders will likely have their eye on if AMC falls below its 50-day is the longer-term 200-day moving average. The rising 200-day average is currently near the $14 level, representing potential downside of 60% from current levels.

But a stock's decline below its 50-day moving average does not mean a swift decline back to its 200-day moving average is in order. One sign traders look for to generate a buy or sell signal is the crossover between the shorter 50-day and longer 200-day moving averages.

A buy signal is flashed when the short-term moving average crosses above the longer-term moving average, as happened for AMC in February. Using this method, a sell signal for AMC would not be generated unless the 200-day moving average crossed above the 50-day moving average.

As AMC tests its key 50-day moving average support level, short bets against the company are increasing, according to data from S3 partners. Over the past week, short bets increased 6% to 5 million shares, worth nearly $200 million.

While AMC short-sellers are down more than $3 billion in 2021 on a mark-to-market basis, that could soon reverse if AMC breaks below its 50-day moving average and trends towards its 200-day moving average.