Stock analysis

MGM Downgrade Could Unnerve Shareholders

MGM Resorts International (MGM) shares are under pressure on Monday morning following a Deutsche Bank downgrade from “Buy” to “Hold.” At the same time, market players are assessing upbeat Telsey Advisory Group (TAG) comments, encouraged by MGM’s asset sales and $1 billion share repurchase program. Price action in coming days could be instructive, as buyers could step up and complete a June breakout or risk the return of aggressive selling pressure.

The gaming giant has acted well despite weak to nonexistent Las Vegas growth following years of overbuilding. MGM’s mix of other U.S.-based assets has not helped its bottom line because those secondary venues are equally overbuilt. As a result, the company has turned to asset and cash management, lowering costs until higher visitation catches up with too many rooms and too much casino square footage. (See also: A Future Shift in the Las Vegas Casino Industry.)

MGM Long-Term Chart (1993 – 2017)

A multi-year uptrend ended at $12.44 in 1993, giving way to a rectangular correction that yielded a March 2000 breakout, at the same time that the dotcom bull market came to an end. That buying impulse fizzled out quickly, stalling near $19.50 ahead of another three years of dull sideways action. A 2004 breakout played catch-up with broad benchmarks, generating healthy momentum into the October 2007 all-time high at $100.50.

The stock plunged during the 2008 economic collapse, losing more than 98% of its value into the March 2009 all-time low at $1.81. A bounce into 2010 highlighted nearly lethal technical damage during the bear market, stalling in the mid-teens after retracing just 15% of the vertical decline. That level marked resistance for the next three years, finally yielding a 2013 breakout that stalled at $28.75 in March 2014. (For more, see: MGM Resorts Welcomes You to the Show.)

A correction into February 2016 tested new support in the upper teens, completing a triple bottom reversal that generated healthy buying interest and reached 2014 resistance in the fourth quarter. It paused at that level into April 2017 and broke out, lifting into June’s nine-year high at $34.34. Price action since that time has carved a broad rectangular range with support near $30.

The monthly stochastics oscillator crossed into a sell cycle in July 2017, predicting at least six to nine months of relative weakness. In turn, this headwind could presage a decline into rectangle support, setting up a critical test at the second quarter breakout level. The lack of significant upside since that time raises the odds for a pattern failure that could signal a long-term term top and steep downturn. (See also: MGM Resorts’ Q2 Earnings Beat on Higher Revenues.)

MGM Short-Term Chart (2014 – 2017)

Price action after the 2014 top carved a rounded correction that found support in the upper teens, ahead of a recovery wave that completed the 100% retracement into the prior high in the fourth quarter. The stock then spent four months completing the handle of a cup and handle pattern, while the subsequent breakout stalled after gaining just 4.5 points. This lack of extension raises the odds for a failed breakout through $30, while a buying spike above $35 would confirm the longer-term uptrend.

On-balance volume (OBV) peaked in 2014 and entered an aggressive distribution wave that ended in 2015, many months before the 2016 low. This resilience contributed to a strong uptick into the fourth quarter of 2016, allowing the indicator to match bullish price action during the 2017 breakout. It continues to hold high in the multi-year range, offering bulls a much needed tailwind. (For more, see: MGM Resorts Prospects Bright on Macau Revival, Risks Stay.)

The Bottom Line

MGM is losing ground on Monday following a key downgrade, despite a broad-based relief rally. The lack of progress since the stock broke out to a nine-year high in June could be taking its toll on shareholders, but bulls will retain control unless a decline cuts through new support at $30. (For additional reading, check out: The Evolution of the Gaming Market.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>