Look For This Stock to Drop 15%

The main indices were a little mixed with their performances on Wednesday in that the Dow and S&P moved steadily higher throughout the day while the Nasdaq and Russell both opened in negative territory and struggled to stay in positive territory.

At the end of the day three of the four finished in positive territory. The Dow led the way with a gain of 0.32%. The S&P and Russell gained 0.22% and 0.24%, respectively. The Nasdaq lost 0.01% on the day.

[hana-code-insert name=’adsense-article’ /]The sectors were split right down the middle with five moving higher and five moving lower.

The big winners were the financial sector with a gain of 1.56% and the industrial sector with a gain of 1.13%.

The two biggest losses were on the consumer staples sector (-0.74%) and the utilities sector (0.51%).

My scans continued to produce bearishly skewed results on Wednesday with 34 names on the bearish list and 22 names on the bullish list.

The barometer moved up to -11.9 from -16.5. More than half of the names on the bearish list could be attributed to stocks and ETFs from two sectors—tech and health care. Half of the names on the bullish list belonged in two sectors—energy and financials.

After two straight bullish trade ideas, I have a bearish one for you today. MGM Resorts International (NYSE: MGM) appeared on the bearish list last evening and the company’s fundamentals are average to below average. The IBD ranks are 46 on the EPS rating and a C on the SMR rating.

The company saw earnings drop by 24% in its last earnings report and sales have only grown at a rate of 5% over the last three years. The company also announced a lawsuit on Tuesday against the victims of the mass shooting from last October. The suit was filed in order to avoid liability, but it is being widely criticized by the public and could become a public relations nightmare for the company.

What caught my attention more than anything on the chart was the bearish stochastic crossover while the readings are in overbought territory. We saw a similar development in April just before the stock dropped sharply after its earnings report. MGM is due to release earnings on August 2.

Buy to open the Sep18 $33-strike puts on MGM at $2.80 or better. These options expire on September 21. The stock will need to drop to $27.40 and I would use that as my target. The last two big drops in January/February and in April/May were both over 15% and if we get a drop of over 15% from the recent high, that would take the stock down to $26.70. I would suggest a stop at $32.

— Rick Pendergraft

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Rick Pendergraft, Trades Of The Day

Rick Pendergraft has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick's analysis process includes fundamental, sentiment and technical analysis.