Shares of U.S. casinos with Macao properties plummeted at the start of the coronavirus outbreak but have bounced off corrective lows in the past week, trying to carve bottoms. This price action looks unsustainable in light of recent headlines and is attracting the renewed interest of short sellers looking for less risky bets than jumping blind into Tesla, Inc.'s (TSLA) parabolic uptrend. Their interest could translate into healthy profits in coming weeks as these stocks reverse and test January lows.

Macao authorities announced on Feb. 4 that they're closing all casinos for the next two weeks in order to contain the outbreak, but it's unlikely that normal operations will resume in mid-February given the outbreak's steady escalation. The squeeze in U.S. stocks this week has dampened the reaction to that bearish news, allowing traders to open short sales at advantageous price levels. Even so, tight stops and aggressive risk management will be needed to profit from lower prices.

Chart showing the share price performance of Wynn Resorts, Limited (WYNN)
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Wynn Resorts, Limited (WYNN) owns three Macao properties: Wynn Macao, Encore at Wynn Macao, and Wynn Palace. The stock tumbled from a four-year high in 2018 in reaction to sexual harassment allegations against former CEO and major shareholder Steve Wynn. The decline posted losses in excess of 50% before settling near $90 at the start of 2019. It recovered about half those losses into May, topping out just above $150, and has been range bound in the past nine months.

A bounce that started in the fourth quarter reached range resistance in January 2020, just before coronavirus news hit the headlines. The stock dropped more than 14% in the next five trading days, settling near R121, which is narrowly aligned with the 200-day exponential moving average (EMA) and .618 Fibonacci rally retracement level. The bounce into February has filled a sell gap between $127 and $132, reaching resistance at the 50-day EMA and .382 sell-off retracement in Tuesday's session. Accumulation readings, which fell sharply during the downdraft, remain at their lowest level since October,

Smart traders will be watching for an intraday reversal around the current price level, along with an uptick in selling volume. There are no guarantees that the stock will turn on a dime, so less aggressive players may wish to stagger their bets, picking up a partial tranche at this level while awaiting a final surge toward the .50 retracement at $137. In either case, odds are high that the stock will test and likely break the January low in coming weeks.

LVS
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Las Vegas Sands Corp. (LVS) owns and operates The Venetian Macao, the largest casino in the world, along with five other properties. The stock posted a four-year high in the low $80s in June 2018 and turned sharply lower with its rival, even though it wasn't involved in the scandal. Selling pressure eased at a two-year low in the mid-$40s in December, setting the stage for a 2019 recovery effort that stalled at the .618 sell-off retracement level in April.

The subsequent downturn bottomed out in August just four points above the December low, giving way to a bounce that reached resistance at the 2018 high in December. It broke out in early January and reached the .786 retracement when virus news triggered a reversal that failed the breakout in a 17% five-day decline. It also found support at the 200-day EMA, yielding a bounce that filled the sell gap between $64 and $67 earlier this week.

The uptick lifted above the 50-day EMA and into the ,618 sell-off retracement level on Tuesday, marking an ideal location for short sellers to enter new positions. However, like its rival, it makes sense to wait for an intraday reversal to avoid getting run over by a moving train. It's likely that the turnaround will start soon because the bearish divergence between the recent upticks and the frightening news flow isn't likely to last.

The Bottom Line

U.S. casino stocks with large Macao properties have bounced off deep lows but could offer profitable short sales in coming weeks.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.