Stocks dropped yesterday after the Trump administration revised its expectations of the potential COVID-19 death toll in the United States to be as high as 240,000. This continued volatility highlights the need to be flexible with the strategies we employ to trade our way through the uncertainty.
That’s why we’re recommending a short stock position in Wynn Resorts (NASDAQ:WYNN). We don’t think this stock is ready to recover just yet.
Why it Looks Bad for WYNN
The “shelter-in-place” orders we are seeing around the world should continue to curb tourism to WYNN’s casinos in both Macau and Las Vegas. We still feel that the impact of social distancing on WYNN is likely to last longer than the virus outbreak itself.
Today, we got news from the Department of Labor showing that there were over 6.6 million jobs lost in the week ending on March 28. The effect of these job losses could also extend into the future. Once a recovery begins and companies start hiring, gambling and traveling won’t be people’s go-to activities.
WYNN and other gaming stocks with operations in Macau and Las Vegas are extremely sensitive to changes in both the Chinese and U.S. economies. If the outlook is poor, these stocks tend to fall for an extended period, which is what we saw last year when the Chinese economy started to lag as the trade war bit into manufacturing activity.
Further, the company has already been struggling with falling margins for the last few years. This is not a problem unique to WYNN, but it means investors are unlikely to rush back into the stock when the market starts to settle again.
Stocks with rising margins and top-line growth are most attractive in the early stages of a bounce, so a turn to the upside would likely leave WYNN behind.
Dropping After a Big Rally
Last week, when the market was making big moves higher, WYNN hit resistance at $80. In the selling this week, it has tumbled back down to around $55. We think it can go lower.
Daily Chart of Wynn Resorts, Limited (WYNN) — Chart Source: TradingView
If you look at the chart above, you can see that WYNN’s 52-week low is $35.84. As we get further into this crisis, we believe it could retest or drop below that level.
If that happened, shorting WYNN at around $55 could net you over a 30% return.
However, even if WYNN doesn’t retest its recent low, we still believe it will struggle going forward.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.