Tuesday, October 13, 2009

10/12/09 Trade review: WYNN and LVS

Yesterday’s trade involved a great sector play in casinos. Around 13:24 ET, news came over the wires that gambling restrictions would affect casinos in Macau. This caused both WYNN and LVS to break out of tight ranges and sell-off on heavy volume. Traders at TradingRM were able to take advantage of the aggressive selling and book solid winners in both names.

These trades provided excellent examples of indicators of trend reversals. As shown in the 1-minute charts below (click to enlarge), after roughly 10 minutes of selling, both LVS and WYNN had bullish candlestick patterns. LVS (left) formed a dragonfly doji and WYNN (right) formed a hammer.

A dragonfly doji is a candle that forms during a downtrend with little or no upper wick, an almost non-existent body, and a sizeable lower wick. The difference in the hammer is that a small body forms near the upper end of the range. These patterns form due to an unsustainable sell-off (creating the long lower wick) followed by a rally which gives buyers control of the trend near the close of the period. Although these candles are not definite signs of reversal, they show that the selling is losing momentum.

Another indicator that the price action was losing steam was the volume. As shown in the charts, volume after the dragonfly doji in LVS was a large green bar and after the hammer in WYNN was a weak red bar. This is further indication that the move was reaching its end and it was time to ring the register.

Candlestick patterns and volume are just a few pieces of the puzzle used to evaluate a trend. By paying attention to signs of reversals, our traders were able to avoid adding more risk and/or sell into the move to take profits.

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