Shares of retailing giant Wal-Mart Stores, Inc. (NYSE:WMT) have nothing but trended lower thus far in 2015, and even recently, WMT stock was trading down by as much as 10% for the year. However, as a result, WMT has reached a better bigger-picture area of support that could hold up into Walmart’s upcoming earnings report.
I’m looking at a couple of ways of taking advantage of a post-earnings move in WMT stock right now. Here’s what I see:
As part of its year-to-date weakness, Walmart stock hasn’t just undeperformed a host of its peers, but also the consumer staples sector (to which it belongs) as a whole.
One of the focal points for WMT and other employers with a lot of minimum-wage workers has been the move to pay above this minimum threshold. Earlier this year, Walmart announced it was hiking pay for about half a million of its workers to $9 per hour, or nearly 25% above the federal minimum hourly wage. McDonald’s Corporation (NYSE:MCD) made a similar move earlier in the year.
However, with higher pay comes margin pressure unless costs are passed along to the consumer — and while this likely wasn’t the sole cause of the poor performance in WMT stock, it certainly didn’t help things.
WMT Stock Charts
Looking at the multiyear chart of WMT stock, we see that the late 2014 rally broke Walmart out of a consolidation pattern that had been in the making since spring 2013. However, the breakout ultimately got too steep and began showing negative divergence between price and momentum. This led to a top in the stock in January and the ensuing mean-reversion move lower.
We can see that the year-to-date slide has brought the stock back into its 2013-14 trading range, where lots of price history stands a good chance of also acting as bigger-picture support.
Zooming in on the daily chart and focusing on the year-to-date move in WMT stock, we see that while momentum — represented by the Relative Strength Index (RSI) at the bottom of the chart — bottomed in mid-April and made a series of higher lows since, price marginally undercut the April lows just a few days ago, thus flashing positive divergence.
While shares marginally broke out of the downtrending channel (marked by two black parallels) on Tuesday, WMT shares largely remain in that downtrend.
The aforementioned loss of downside momentum coupled with the bigger-picture price support from the weekly chart above are two first signs that shares could react to the upside following the Walmart earnings report.
As I see it, there are two scenarios to watch for:
- WMT stock gaps down (i.e., sells off after the May 19 earnings report), which would take place within the context of the aforementioned downside exhaustion readings. Any bullish reversal thereafter would likely set up a trade to buy Walmart stock for a snap-back move higher.
- WMT rallies after the earnings report, in which case we could then use the aforementioned downside exhaustion readings as confirmation of the move. A rally into the mid-$80s could ensue.
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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.
