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Casino Stock Could Deliver Double-Digit Profits in 12 Weeks or Less

Serge Berger

Casino stocks are up nicely this year, which given their favored status among traders, shouldn't be surprising.

While stocks like Wynn Resorts (WYNN), Las Vegas Sands (LVS) and MGM Resorts (MGM) trade in a rather volatile fashion, there is a tendency for them to be chased and sold along with the broader market trends. In other words, they are highly correlated with the market. And this often leads to the formation of tight patterns on the charts that offer trade setups with clearly defined risk and reward.

All three major casino stocks are trading in bullish patterns, but I like MGM best right now. It currently displays the most compelling potential breakout from a long-term point of view and the tightest pattern on the close-up charts.

MGM rallied sharply off its 2009 lows into an early 2011 double-top. Since its 2011 highs, the stock has traded in a wide range, unable to make higher highs, but equally as significant, holding a higher low versus its 2009 lows.

So far in 2013, the stock has staged two significant breakouts from visually clear and tight patterns, the most recent of which is still in its early stages and looks to have room to run at least another 5% in the near term.  

Beginning with a weekly chart looking back to late 2008, we can see that the stock bottomed out in early 2009, along with most other stocks. As I mentioned, MGM is closely correlated to the broader market. 

As the quicker traders noticed that the Armageddon scenario was off the table, they began to pile into momentum names like MGM. As a result, MGM catapulted more than 600% higher in roughly two months' time. Silly? Most likely, but the move perfectly illustrates traders chasing their favorite stocks.

MGM continued to trade in wild swings until it found a double-top in January 2011 (matching its early 2010 highs) around the $16.90 area, which has not been surpassed since. In fact, the area between $15.90 and $17 has now been tested no less than seven times since early 2009. 

Ultimately, given the number of tests in this price area, the odds favor a significant breakout to higher highs. It's important to notice that a significant higher low has already been established close to the $9 area, which has also been tested several times since late 2009. This has created a trading range between $9 on the lower end and roughly $16.90 on the upper end. 

MGM Stock Chart - Weekly

Closer up on the daily chart below, we see that last week the stock pushed past a two-month resistance area (the May highs at $15.95), after forming a tight consolidation pattern just below the May highs during the past two weeks. The important precursor to last week's breakout was the breakout in late April, which was re-tested at the bottom of the stock's May-to-June pullback.

While MGM's 25% ascent off the June 24 reaction lows has been steep, from a longer-term perspective, the stock now looks to have enough momentum to at the very least reach the upper end of the longer-standing trading range at $16.90-$17. An eventual breakout past this level and toward $19 is very much in the cards, which could be a second and somewhat longer-term price target.

MGM Stock Chart - Daily

Recommended Trade Setup:

-- Buy MGM at $16 or higher
-- Set stop-loss at $15.70
-- Set initial price target at $16.90 for a potential 5% gain in 3 weeks
-- Set secondary price target at $19 for a potential 18% gain in 6-12 weeks

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