This from Smart Profits Report:

From late 2005 until about a year ago, gaming and casino stocks racked up huge gains – especially those with a strong presence in Macau. These include Las Vegas Sands (NYSE: LVS), Wynn Resorts (Nasdaq: WYNN), and the MGM Mirage (NYSE:MGM).

Since late 2007, however, these stocks have endured a huge drop, losing 70% to 90% of their value. Casino-related stocks such as International Game Technologies (NYSE:IGT) and Shuffle Master (Nasdaq:SHFL) have also lost a good chunk of their value.

For China, allowing some U.S. casinos to enter the Macau market is a big deal. This paves the way for further penetration into the Asian markets, which is why the casinos mentioned above did so well from 2005 to 2007.

I don’t think it’s a coincidence that these three casino stocks made their highs in October 2007 – the same month that the Chinese stock market (SSE Composite) topped out. Since then, the SSE Composite has lost close to 70% of its value.

Chinese Visa Restrictions Stifle The Action Around The Craps Table

So why has this sector endured such a brutal selloff?

There are a number of other reasons, including recessionary pressures, a lack of funding for some of the U.S.-based Macau casinos, plus China’s efforts to limit the number of visas that residents of the southern Chinese province of Guangdong need to enter Macau.

As of October 1, residents now are allowed one trip every three months instead of two months – bad news since Guangdong customers are one of Macau’s biggest revenue sources. This has investors wondering if China has any additional changes in mind, with the uncertainty weighing on these casino stocks.

Until last week, that is…

The Upside And Downside Scenarios For These Three Sector Stalwarts

Last Tuesday, LVS, WYNN, and MGM all made their recent lows. But that was the trigger point for a huge rally, with the stocks then posting gains of 100% to 200% over a four-day period.

Let’s take a quick look at upside and downside…

Upside: Based on the intraday charts, these three stocks probably have higher to go, at least over the near-term.

Downside: The intermediate-term picture is a little hazier. None of the three have triggered daily buy signals yet. Moreover, if the stock indexes are in a bearish consolidation pattern and go on to make new lows, they could give back some, or all, of their recent gains.

However, if the S&P 500 makes new lows, and moves down to the 765 area, and these three stocks do not make new lows with the index, it should represent a good, intermediate-term buying opportunity.

How To Play The Casino Like James Bond

If the gaming and casino stocks have set their lows, LVS, WYNN, and MGM should benefit more than the others.

However, if you want to diversify and spread your risk in this sector, there are a couple of other ways to do it.

Take a look at the Ladenburg Thalmann Gaming and Casino Fund (MUTF:GACFX). Unlike the Market Vectors Gaming ETF (AMEX:BJK), which is less than a year old, I prefer this fund because there is more data to analyze.

Here’s a weekly chart of GACFX, with a regression channel drawn from the October 2007 high.

The top of the regression channel this week is around $5.20, but for each week that passes by, the regression channel drops about $0.15. A couple of weekly closes above the regression channel should be bullish over the longer-term.

Source: There’s Money In This Sector… Literally