"What is your favorite movie" is correct if you are asking a general question. If, for example, you were holding 2 dvds and were asking someone which movie they would like to watch, you could say something like "Which is your preference?" or "Which is your favorite?". If you can add "Of these options.." to the beginning of the question, then you would use "which". For example, "Of these two DVDs, which is your favorite?" would be correct. Also, if you were in a movie theater with a date and were looking at the list of available movies, you would ask "Which movie do you want to see?" But if you were just making a conversation with someone about movies, you would most likely ask "What is your favorite movie?"

What is your favorite movie - This is good. (general) For the second one you would say - Which movie is your favorite. (specific) Although I think if I was with someone and they showed me a bunch of movies, say in their living room or something, I could say 'which is your favorite movie' and it would be okay - because we are selecting from a visual group.

They are both correct, however the second one ("which is your favorite movie?") would only be correct if there were a choice of movies.