Are the Casino Stocks a Gamble?

09/12/2014 10:00 am EST

Focus: FUNDS

Thomas Aspray

, Professional Trader & Analyst

The gaming industry is a prime example of a lagging sector, but the better performing stocks should be the new leaders once this industry group completes its correction, so MoneyShow’s Tom Aspray examines the charts to see if now is the time to buy any of these casino stocks.

Stocks again opened weak on Thursday, but once again, the lower prices were met by solid buying as the S&P 500 was able to close above Wednesday’s highs. This makes today’s action important as—though the S&P would need a sharply higher close to turn positive for the week—the Nasdaq 100 is currently up for the week.

One of course needs to watch the market internals, which were positive again on Thursday. The S&P 1500 Advance/Decline chart below is from stockcharts.com and reflects the combined market internals of the S&P 500, S&P 400, and S&P 600.

chart
Click to Enlarge

The advance/decline lines have been leading the market higher since the early days of the bull market. They have also indentified every wave of panic selling as a buying opportunity. The S&P 1500 A/D line made a new high in April and then broke through key resistance (line b) in May, point 1.

This breakout came at the height of the “most hated market rally” sentiment and general skepticism over the market that kept many on the sidelines. From the new high in early July, the A/D line came back to retest the breakout level, point 2, before moving back above its 21-day EMA.

The A/D line made a marginal new high on September 2 and has just bounced from its WMA. A strong close above the resistance at line a, would be a very bullish sign and could lead to another strong push to new highs by the major averages. Conversely, a break below Tuesday’s lows will be consistent with a further correction.

As I have noted several times recently (Watch These Lagging Sectors), it is not a market where you be chasing prices or buying those underperforming market industry groups without clear signs that they have bottomed. The Dow Jones US Gambling Index (DJUSCA) is a good example of a lagging sector as it is down 20.7% from the early March highs.

During the same time period, the Spyder Trust (SPY) has gained 7.4%. Some of the gambling stocks are doing much worse as Caesars Entertainment Corp. (CZR) is down over 41% YTD. Another big loser is Las Vegas Sands (LVS), which is down 19.8%. Some gambling stocks have bucked the trend. Once this industry group completes its correction, the better performing stocks in the industry groups should be the new leaders.

chart
Click to Enlarge

Chart Analysis:  The Dow Jones US Gambling Index (DJUSCA) tested the weekly starc+ band for two weeks in early March before it reversed to the downside.

  • The 38.2% support is now being tested with the weekly starc- band at 795.78.
  • The more important 50% Fibonacci support is at 762.
  • The relative performance did make a new high with prices but then violated its uptrend (line b) in the middle of June.
  • The weekly RS line is well below its declining WMA.
  • The daily RS analysis (not shown) shows no signs yet of bottoming.
  • The weekly OBV has been holding up well during the correction as it is well above the support at line c.
  • The 20-week EMA is now at 913 with the downtrend, line a, at 980.

MGM Resorts International (MGM) is up 3% YTD but is currently 15.7% below its 52-week high of $25.39.

  • The chart shows an apparent flag formation, lines d and e, which is consistent with a pause in the major uptrend.
  • MGM is still above the May low at $22.52 with the weekly starc- band at $21.72.
  • The major 38.2% Fibonacci support from the 2012 low is at $21.11 along with the lower support, line e.
  • The weekly uptrend, line f, is at $20.18 with the major 50% support at $18.75.
  • The weekly RS peaked with prices in early 2014 and is now in a solid downtrend, line g.
  • It is still well above the longer-term uptrend, line h.
  • The weekly on-balance volume (OBV) is in a gradual downtrend, line i.
  • It shows no signs yet of heavy selling and there is important OBV support at line j.
  • The daily chart still looks negative as MGM has just rebounded back to its 20-day EMA at 24.58. The EMA Osc closed at -1.40.
  • There is more important resistance now at $25.39.

What it Means: The gambling stocks have often provided great profit opportunities but the technical action of the industry group, as well that of MGM Resorts International (MGM), suggests it is too early to buy.

How to Profit: No new recommendation.

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