Shares of natural foods supermarkets chain Whole Foods Market, Inc. (WFM) rallied sharply Thursday following the company’s better-than-expected fourth-quarter earnings report.
WFM stock has been struggling since late 2013 and took a notable beating in late spring of this year. However, Thursday’s rally moved the stock out of a multimonth trading range and back above its 200-day moving average. Active investors and traders can now look to buy Whole Foods stock for a continued lift into year-end, using clearly defined risk parameters.
Whole Foods earnings came to 35 cents per share for the fourth quarter, up 9% year-over-year and better than estimates by 3 cents. Meanwhile, revenues rose 11% to $3.3 billion to just edge expectations for $3.26 billion.
In the conference call following the earnings report, WFM reiterated that its 2015 gross margins are expected to narrow as a result of higher spending. Still, Whole Foods sees 2015 sales and EPS growth of more than 9%.
Following the earnings report, analysts remained upbeat about WFM stock, with price targets on average ranging between $40 and $50.
WFM Stock Charts
Looking at the multiyear weekly chart of WFM stock, the most visually notable development in recent years was when the stock broke below its late 2008 uptrend this spring. In rather classic fashion, this took place after the stock steepened its rally in the autumn months of 2013, peaked, and lost all of its upside momentum.
After bottoming in May, downside momentum as represented by the Relative Strength Index (RSI) slowly began to form higher lows while price made marginally lower lows, thus forming so-called positive divergence between price and momentum. With Thursday’s big rally, Whole Foods has now acknowledged and confirmed these higher lows in momentum and looks ripe for a further push higher. For the time being, however, this should be considered a mean-reversion bounce to the upside rather than a new major bull run in WFM stock.
On the daily chart, we see that Thursday’s 12% rally, which came on a surge in volume, has not only managed to bring the stock back above its 200-day simple moving average (red line) for the first time since early January, but it also has moved WFM stock back into the down-gap from May.
From this perspective, Whole Foods stock has a defined upside attraction point, which is the top of the gap (i.e., the top of the blue box on the chart), which would result in a complete gap fill.
Active investors and traders could look to buy WFM stock on a push past Thursday’s intraday highs near $45 for a move toward $48. However, any drop back below Thursday’s lows near $43.40 — thus back below the 200-day moving average — would mean Whole Foods needs more time to consolidate before potentially moving higher again.
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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.
