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Despite the recent slide in the broader U.S. equity landscape, some stocks remain resilient and are building tight bases from which they can power higher.
Casino stocks are one defiant group that has held up well and looks ready to pop. With their history of price volatility, yet respect for technical levels on the charts, traders tend to watch them closely.
Luxury hotel and casino operator Wynn Resorts (NASDAQ: WYNN) does not always have a strong correlation with the broader stock market, offering traders opportunities such as the current setup I'm seeing.
The weekly chart below, which looks back to 2006, shows two notable developments that we can use as reference points:
1. A double top: After a steep run, WYNN topped in late 2007 and dropped sharply with the unraveling of the financial crisis. After bottoming in early 2009, along with the rest of the market, the stock staged a tremendous rally into July 2011. Through the longer-term lens, this marked an important double-top that led to a sharp correction.
2. An important Fibonacci retracement: The ensuing correction, while painful for longer-term shareholders, screeched to a halt exactly where it should have -- at the 50% retracement of the rally off the 2009 lows. After the 12-month correction, WYNN began building a base that set the stage for the latest rally.
On the daily chart below, we can see that WYNN continues to respect its 2012 uptrend line. After its May top, the stock tumbled 16% to a June bottom, where it found support just north of its 200-day simple moving average.
After developing a series of higher lows, WYNN finally staged a significant multi-month breakout on July 31, as the stock broke to the upside of its 50-day simple moving average, which coincided with the May 2012 downtrend line.
WYNN then rallied for a few days before it began to settle in to a multi-week sideways pattern, which one could also label as a bull flag formation, depending on how the lines are drawn.
And on Aug. 23, after building this base well above the 50-day and 100-day simple moving averages, the stock broke lateral resistance around the $141 mark. This breakout again displayed the stock's tendency to respect its technical levels and to form tight bases from which traders can plan well-defined trades.
Buying WYNN on a pullback could allow traders to play the stock for a quick pop, even while the broader market struggles.
Recommended Trade Setup:
-- Buy WYNN at $141.90 or lower-- Set stop-loss at $139-- Set price target at $150 for a potential 6% gain in 3-6 weeks
Once a pillar of the American economy, this group is crumbling, and investors would be wise to avoid the rubble.
After a solid run, the technical evidence tells us shares are headed for a quick drop.
This sector is one of the few showing real growth, and there is an undeniable upside catalyst on the horizon.