Casino Stock's Breakout Could Make Traders Double-Digit Profits

December 6, 2013

One thing about the stock market is that it is never boring. Just last month, casino operator Wynn Resorts (WYNN) broke down below a rising trendline, and within days it changed its mind. This week, the stock not only moved higher to break out from a bullish flag pattern, but it is once again challenging all-time highs.

With lady luck smiling on WYNN once again, it is time to buy this recovered sector and WYNN in particular.

Last month's false breakdown below both the rising July trendline and the 50-day moving average did indeed look bearish. After all, the stock already failed at resistance supplied by its all-time highs set by the 2007 and 2011 peaks. And with momentum indicators also heading south, things did not look so good.

WYNN Stock Chart
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WYNN Stock Chart

But two days after its breakdown, the stock suddenly surged with exceptionally heavy volume. It also set a low in place that helped define a newly emerging and bullish flag pattern.

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Flags are simply countertrend moves that usually provide a period of rest in a rally. If and when the upper border is pierced, the buy signal is triggered as the bulls are back in control.

That breakout arguably occurred Dec. 4. I say "arguably" because the close was right at the upper border, but with the market down on the day, I gave it the benefit of the doubt. Price action on Dec. 5 removed that doubt and the breakout is real.

Resistance from major highs is still above at $175, plus or minus a point or two, but the flag pattern looks to be just what the croupier ordered. To me, it has the spirit of a cup-and-handle pattern with a decline and recovery -- the cup -- and a pause just before the breakout -- the handle.

WYNN Stock Chart
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WYNN Stock Chart

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Long-term charts also show something very interesting: nested cup-and-handle patterns. As we can see in the chart above, the bear market and recovery between 2007 and 2011 is the large cup, and the 2011-2013 dip and recovery is the large handle. On the next smaller scale, that large handle is also the smaller cup, as mentioned above.

While the short-term breakout is in place, a move to new highs would confirm the breakout from the larger pattern and forecast a rather sizeable move higher.

In the shorter term, I can see a move up to $192 taking place. For this, I use a simple measuring technique of projecting the vertical height of the flag up from the breakout point. And given that we are talking about a long-term breakout as well as a short-term event, I will be so bold as to look for the second multiple of that height as the objective before a meaningful correction sets in.

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Recommended Trade Setup:

-- Buy WYNN at the market price
-- Set stop-loss at $162
-- Set initial price target at $192 for a potential 12% gain in six weeks

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