One of the great features of options trading is the protection it offers against large absolute losses from surprise gaps in price from the underlying stock. That protection came in handy when casino and hotel company Wynn Resorts, Limited (WYNN) gapped down following news of a fresh regulatory crackdown in Macau, China. WYNN gapped down 7.8%, fell as much as 13.8%, and ended the day with a 10.9% loss. The trade was also a fresh lesson in moving too early on a trade. I jumped into a call spread in (WYNN) ahead of getting a confirmation of a breakout above resistance at the 50-day moving average (DMA). My review of lessons learned revealed tricky technicals that should have caught my attention and changed my decisions.
The Tricky Technicals
Wynn Resorts (WYNN) caught my attention when it sliced through 50DMA resistance (the red line above) on strong buying volume and a 5.6% gain. WYNN next turned around and tested 50DMA support twice. In the middle of those tests I bought my call spread. In doing so, I violated my rule to wait for confirmation before trading on a breakout (or a breakdown). A confirmation of a breakout occurs after a second higher close. Instead of confirming, WYNN just slid down its 50DMA and produced the tricky technicals that both lured me in and should have warned me out.
WYNN traded at almost 9x its average daily trading volume. So, ironically, while I am smarting from a loss, WYNN looks like it is setting up a fresh bullish entry. The surge in volume along with the plunge in price creates the potential for a washout of sellers. The confirmation for such a conclusion is a close above the intraday high of the washout day. Needless to say, I am content to wait and not allow tricky technicals to send me stumbling. On the downside, a breakdown through the August lows could lead to a fill of the November earnings gap up.
The Signal from Las Vegas Sands
Las Vegas Sands (LVS) is a peer to Wynn Resorts and similarly holds substantial business interests in Macau. Traders and investors punished LVS to the tune of a 9.8% loss. If I had checked on LVS before making my premature trade in WYNN, I would have seen the tricky technicals of a failing test of 50DMA resistance. Until a 4.2% loss, LVS tested its 50DMA resistance 4 times and failed. Given the direct correlation between LVS and WYNN, those struggles should have stayed my hand on the WYNN trade. Instead, I can only marvel in hindsight at a key missed signal.
Despite a percentage loss smaller than WYNN’s, LVS sits in a more precarious position. The stock bounced off its July low, just as WYNN did, but that low also tested the price depths of the March stock market collapse. In other words, these lows need to hold. Otherwise, LVS could easily resume the steep selling that characterized its descent from the 2021 highs in February and March. On the other hand, the 6x surge in trading volume sets up a potential seller’s washout and a major double bottom. Just as with WYNN, the buy signal comes from a close higher than the intraday high.
The Options Angle
CNBC Fast Money reported on heavy options trading in LVS. Call volume exceeded put volume by 3-to-1. Total options volume was 8x the normal daily volume. Traders rushed to make bullish bets!
The most popular bullish bet was the Jan 40 call option. Traders snatched up 28,700 contracts for $3.62 each. The January expiration means traders are looking ahead to a good earnings report sometime in October.
The Trade
The tricky technicals in WYNN got trickier thanks to the great significance of either upward or downward momentum following the plunge in price. Confirmation closes will be important in managing entries and existing positions.
Be careful out there!
Full disclosure: long WYNN call spread
Great article on confirmations – thanks!
The title probably needed “confirmation” in it somewhere. 🙂