Shares of retailer Wal-Mart Stores, Inc. (WMT) rallied big Thursday following a mixed third-quarter earnings report. From a technical perspective, WMT stock staged a major breakout move that looks promising for the longer-term and also helped push the Dow Jones Industrial Average to fresh all-time highs.
In the near-term however I would caution buying Walmart stock here … and active traders and investors could even consider the short side after a confirmed bearish reversal marks the chart.
Walmart earnings for Q3 came in at $1.15 per share, beating analyst estimates of $1.12. The top line came in at $118.1 billion, just below the bar at $118.4 billion. Still, year-over-year, earnings were higher by 1% and sales grew 2%.
At the same time, traffic was slightly lower despite the drop in oil prices as of late, which might be one reason for concern on the fundamental side. Considering that Walmart shoppers are made up of a population that has seen little to no real wage growth in recent years, it is questionable how much better comps WMT can show going forward.
WMT Stock Charts
From a technical perspective, which even matters to a stock like WMT, the price action is very much a tale of two tapes.
Looking at the long-term weekly chart below, note that after breaking past a long-term resistance line in 2012, WMT stock jumped vertically before settling into its next big-picture consolidation phase around the first quarter of 2013. From that perspective, the stock has been trading in a wide range ever since — until it meaningfully broke out of this range Thursday.
While Relative Strength Index at the bottom of the screen has not yet moved to new highs, the RSI did make a relative higher high and broke past its downtrend that stretches back to the summer of 2012. So, from this bigger-picture perspective, WMT looks constructively positioned to move higher, possibly toward the $90 area in the next nine to 12 months or so.
On the daily chart, however, the picture is much different.
Yes, WMT stock made a nice breakout here as well, but the nonstop rally that began in mid-October and so far measures about 13.5% looks increasingly vulnerable for consolidation or mean-reversion lower. Furthermore, considering the equally overbought readings of the large-cap equity indices, it smells of weak risk-reward to chase WMT stock higher at these levels after Thursday’s rally.
From at least a multiweek perspective, WMT stock would to well to retest the $78 to $80 area (previous resistance) before better risk/reward on the long side presents itself. For more active traders, it might even be worth looking at Walmart from the short side on the next bearish reversal day (i.e., the next failed intraday rally), which could then set a target at the aforementioned $78 to $80 area.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
