Casino stocks got beaten up badly in the market crash, falling victim to a perfect storm of negative fundamentals. First, financing for expansion dried up, raising the specter of defaults on multibillion-dollar projects. Second, common folk lost their jobs and had less "fun money" to spend on vacations in general and gambling in particular.

Dismal hedge-fund performance also undermined the casino industry, because its well-greased investors dominate the list of high rollers that casinos depended on for a good chunk of their annual profits. Even worse, both small fry and big fish in the gambling pool might change their habits permanently, now that we're far less wealthy than we were just a year ago.

Sector stocks began to move higher with the broad market in March, with many issues rising into and mounting their 200-day moving averages near the end of April. Rallies then stalled at these critical levels and gave way to sideways patterns that have been digesting the outsized gains that were posted in the strong recovery effort.

The two-month correction has been broad and deep throughout the sector, with many components dropping to multiweek lows. The good news is that this retrenchment appears to be nearing its end, with the odds favoring a long-overdue bounce in the third quarter. With this in mind, let's look at top prospects in the casino and gambling support industries.

First, let me offer a note of caution about trading these stocks. Top Las Vegas operations lagged regional casinos and slot companies during the recovery rally. As a result, nearly all mega-resorts still trade well under their 200-day moving averages. For this reason, I'd avoid Wynn Resorts ( WYNN), Las Vegas Sands ( LVS) and MGM Mirage ( MGM) when picking your sector exposure.

Penn National Gaming (PENN) -- Daily
eSignal

Penn National Gaming ( PENN) sold off to a five-year low in October when it dropped to $11.82. The stock bounced of that level, continued to move higher into early May, and stalled out near 2008 resistance around $35. It then dropped into a rising channel, with support near the 50-day and 200-day moving averages.

Price has been consolidating at support for nearly three weeks. This narrow price action has established a base that could yield a rally up to channel resistance, which is currently around $34. By itself, that would offer a decent short-term trade. Even better, the longer-term pattern is carving out a cup and handle that might trigger a breakout into the upper $40s.


International Game Technology (IGT) -- Daily
eSignal

International Game Technology ( IGT) carved out a four-year double-top pattern and then broke down in July of last year. The subsequent decline dropped the slot-machine giant to an eight-year low at $7.03 in November. The stock tested that level in March and zoomed higher, completing a bullish double-bottom reversal.

The uptrend stalled in May, just above the 200-day moving average. The stock then dropped into a rising channel that is still in place as we move into the third quarter. This is a bullish pattern that favors buying near support. The buy level now converges with the 50-day moving average, so a pullback just below $15 should offer a good entry.


Boyd Gaming (BYD) -- Daily
eSignal

Boyd Gaming ( BYD) dropped to a 10-year low in November, moved sideways for the next four months, and then broke out. The subsequent rally unfolded in a series of waves that culminated in early May with a vertical spike over the 200-day moving average. The uptrend then ran out of steam near $13, with the stock pulling lower for the last seven weeks.

Price is compressed between descending triangle resistance and support from the 50-day and 200-day moving averages. I call this conflict a "rock and the hard place" pattern that should yield a vertical price bar if and when the stock trades back over $9.20. In turn, that breakout would support a bounce to the recovery highs and a rewarding 30% price move.


Bally Technologies (BYI) -- Daily
eSignal

Bally Technologies ( BYI) posted a double bottom between $12 and $13, and then moved higher with the broad market in March. It mounted the 200-day moving average in May, with the uptrend stalling out a few days later and giving way to an ascending triangle. It broke out of that pattern last week and is now trading at an eight-month high.

Everything looks great on this stock, except for the weak accumulation, as noted on the on-balance volume (OBV) indicator. I'd still be a buyer with this bearish divergence but tighten up my stop loss, because the reversal odds are higher than normal. In any case, price shouldn't traded back under triangle support, currently near $27.

Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley was long Penn National Gaming and Boyd Gaming, although holdings can change at any time.

Alan Farley is a private trader and publisher of Hard Right Edge, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of The Daily Swing Trade, a premium product that outlines his charts and analysis. Farley has also been featured in Barron's, SmartMoney, Tech Week, Active Trader, MoneyCentral, Technical Investor, Bridge Trader and Online Investor. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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