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Why it may be time to fold on casinos

Talking Numbers

Casino stocks have been on a winning streak. But it might be time to fold them.

Stocks such as MGM Resorts and Las Vegas Sands have gained roughly 2 percent this week alone while Wynn, despite losing 4.3 percent on Wednesday, is still up 1 percent in the last five trading days thanks to its Tuesday rally. Traders say the catalyst has been more positive news out of Macau, the world's gaming mecca.

(Read: Money talks: Less gambling, more clubbing in Vegas)

But according to Steve Cortes, founder of Veracruz TJM, the good news coming out of China will likely be short-lived.

"It's all about Singapore [and] Macau," Cortes said. "And, that's my problem. I'm actually short emerging markets right now. I'm short the EEM" (the iShares MSCI Emerging Markets Index ETF).

Cortes pointed to HSBC's China purchasing managers index staying below 50 for the fourth month in a row. A number below 50 indicates manufacturing in China is in contraction.

"There are all kinds of credit risks in China," he said. "So, because I am too bearish on China and Asia to believe in these stocks here, I think if anything, you want to use this lift to take profits or even consider shorting names like LVS" (Las Vegas Sands).

“Talking Numbers” contributor Richard Ross, global technical strategist at Auerbach Grayson, said the charts agreed with Cortes that Las Vegas Sands is a “sell.”

"We see the classic trappings of a stock within the throes of a reversal in trend," said Ross about Las Vegas Sands' one-year chart. In particular, Ross is concerned with a head and shoulders pattern that he sees starting in November. Ross placed the pattern's neckline at roughly $71 per share.

"That's the key that unlocks the entire pattern," he said. "I think we get a break below that key level of support."

(Read: Casino riches fuel Macau property 'bubble' forcing residents elsewhere)

Ross also said there's the potential for a $20 to $25 downside in Las Vegas Sands' stock ahead. After the stock broke out of what he sees as a multiyear sideways trend channel last year, Ross expects Las Vegas Sands to eventually revert at least to the upper end of that that trend channel at around $60 per share once it breaks through the short-term neckline of $70.

"I think that's a likely downside for the stock," said Ross. "I would be a seller here. I would add to that short position on a break below the neckline at around $70," Ross added. "The technicals are bearish, just as are the fundamentals."

To see the full discussion on Las Vegas Sands, with Cortes on the fundamentals and Ross on the technicals, watch the video above.

[Disclosures: Steve Cortes is short the EEM.]

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