Since WYNN’s parabolic rise of about 50% from the December 2013 lows to the March 2014 all time highs, we have taken a fairly dim view of the stock’s prospects. The stocks’s ascent had been driven by what were obvious mounting expectations for their Macau operations, which account for a disproportionate amount of their sales, earnings and future growth.
The one year chart is fascinating, considering the strength in the Shanghai Composite and the Hang Seng index for the last few months. WYNN has been a massive under-performer, with the stock’s performance mirroring weak volumes numbers in Macau and spotty economic date in China:
Regular readers will recognize the formation that the stock finally broke down from in late August, “the Triangle of Death”, and it hasn’t been a pretty ride….until today.
Earlier today my friend and talented reporter Linette Lopez at Business Insider tweeted the following:
Macau publishes the worst numbers since the global financial meltdown. http://t.co/cJd30pE0S7
— Linette Lopez (@lopezlinette) September 30, 2014
Which I responded with this as to a question from Tweep @loganslion whether to “buy on the bad news?”
— Dan Nathan (@RiskReversal) September 30, 2014
In my prior life as an active equity trader, I was not one to look to buy weakness, rather look for opportunities where selling momentum was waning, or a turn was in its infancy. Well @loganslion was onto something, as the selling momentum did wane as the stock made an intra-day reversal of 7.5% from the lows:
I know this may be lost on some, as most are still trading with the bull market playbook (and why not while it is still intact) but when trading in a bear market (which is what WYNN is in, down 25% from the March all time highs) it is important to be cognizant of simple rules. Don’t press oversold stocks, especially volatile ones. Today’s price action in WYNN is Exhibit A. The second and just as important, is be patient about your entry on the short side. While today’s 4.5% gains, and 7.5% bounce of the morning lows looks meaty for those inclined to express a bearish view, it makes sense to be mindful of high probability trade entry points.
For instance, today’s price action, if it continues into the close, should see some follow through into the next trading day. If we were to see a move back to the breakdown level at about $195 (red line), which also corresponds with the stock’s declining 50 day moving average (purple line), then the setup gets more interesting:
At that juncture, I might look at initiating a new trade in WYNN. The long-term fundamental headwinds remain in Macau (and could be getting worse if the regulatory crackdown and worker protests intensify), while WYNN still sports a premium valuation relative to peers. WYNN is very closely tied to Macau’s future prospects, which are looking murkier by the month. And that was before the protests in Hong Kong. But timing that bearish view won’t be easy, so we’ll be keen on a good risk/reward entry if the stock cooperates.