After a 10-month long and more than 50 percent decline from peak to trough, is the collapse in Melco Crown Entertainment Ltd (ADR)’s MPEL share price finally over? A technical assessment of Melco’s recent trading indicates that shareholders may finally have some reasons for optimism, but should proceed with caution.
The Good News
From a technical perspective, the past month of trading has looked pretty good for Melco. On December 17, shares set a new 52-week low at $21.04. This dip was likely in response to an article in the South Morning China Post explaining how the Chinese government intends to specifically go after money channeled through Macau’s casinos as part of its crackdown on illegal activity in the city.
This news clearly spooked investors, as Melco experienced a large selloff on the day. However, after dipping nearly to $21.00, the stock rebounded nicely on the day and closed at $22.10 on more than 9.2 million in volume. The volume was the stock's highest in months and more than three times its average daily trading volume. The bounce from the lows continued in the following weeks.
Technical analysts look for high-volume capitulation selling as an indicator of a bottom in a stock. Many times these high-volume selloffs are followed by strong bounces like the one that Melco experienced in the second half of December.
Perhaps even more encouraging than the high volume accompanying the December 17 bottom was the stock’s dip to $22.30 earlier this week. This “higher low” could be an early indication that Melco is no longer in free fall.
The Bad News
The bad news for Melco shareholders is that they’ve seen both of these bullish technical indicators multiple times over the past year, and each time, hopes of a bottom were quickly extinguished. Twice in 2014 Melco stock dipped to a “higher low” than a previous dip, once in June and July and once in October and November. Neither of those formations marked bottoms in the stock.
The stock has also shown signs of potential capitulation selling on new 52-week lows no less than four times between August and October, and none of those selloffs market the stock’s true bottom.
Will This Time Be Different?
Unfortunately, there’s no way for shareholders to know for sure if this recent bottom is the true bottom for the stock. The key numbers to watch from a technical perspective are a sustained bullish breakout above $26.00 (the establishment of a “higher high”) or a bearish breakdown below $21.00 to new “lower lows.” Until one of these events unfolds, Melco shareholders are left to watch and wait.
Disclosure: The author owns shares of Melco Crown Entertainment.
Image credit: Images Money, Flickr
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