Shares of the world’s largest retailer, Wal-Mart Stores, Inc. (NYSE:WMT), dropped on Thursday following a better-than-expected fourth-quarter earnings report. Technically, WMT stock now sits on a critical near-term support level, a break below which would likely translate into a mean-reversion lower, allowing active investors to pick up Walmart stock at lower prices.
Walmart earnings came to $1.61 per share, beating analyst estimates of $1.53. That came on revenues of $131.57 billion, which came in just shy of the consensus expectation for $132.32. A particularly bright spot: The company’s wholesale division, Sam’s Club, had a record year in 2014.
So why did WMT stock get sold on Thursday?
First, Walmart forecast disappointing earnings for both the first quarter as well as for the entire year of 2015. Second, WMT announced that it would increase pay to its U.S. hourly employees to at least $9 per hour, which of course will eat into the company’s margins — that likely spooked some investors.
In the bigger picture, however, Walmart remains a behemoth retailer that has all the pricing power in the world, which is to say that if we are to remain in a bigger-picture secular bull market for U.S. equities for another few years to come — and that’s still my base case — then WMT stock stands a very good chance of rising with the tide.
WMT Stock Charts
Looking at WMT stock through the lens of its multiyear weekly chart, we see that after a bigger-picture consolidation phase from spring 2013 until fall 2014, a sharp breakout occurred in November after the third-quarter earnings report. The stock then rallied strongly into year-end and saw another, final surge into early 2015. Walmart then finally began to consolidate its sharp late-2014 rally, which remains the multiweek story for the stock.
Applying classic technical analysis here, stocks that break past well-defined resistance lines such as WMT did last November often retest those breakout points before moving higher again. If this were to occur in WMT stock, then it could mean-revert lower another 3% to 5% before finding better support.
On the daily chart below, we see that the price action over the past couple of months has also taken the shape of what could be an intermediate-term head-and-shoulders pattern that, if it were to play out in a classic fashion, has a downside target near $75.
Until Walmart breaks below the $82.50 area, however, the stock remains in more of a consolidation mode.
Walmart is an important stock for investor sentiment, and one that in a bigger-picture economic expansion environment should be bought on dips. As such, any faltering into the $75 to $80 area would likely offer active investors an opportune time to buy a stock that could ultimately then move back up into the high $80s.
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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.
