Organic foods retailer extraordinaire Whole Foods Market, Inc. (NASDAQ:WFM) is back on my radar again. WFM stock tumbled after the company’s second-quarter results, which has further damaged both the intermediate and near-term charts.
However, a juicy opportunity is setting up in which risk and reward are clearly defined, so we can drop the emotions and get right to trading.
When Whole Foods reported its latest financial results on May 6, the company came in with earnings of 44 cents per share, which beat analyst estimates by a penny. Top line revenue of $3.65 billion, while up 10% on a year-over-year basis, still came in shy of expectations for $3.7 billion.
While WFM reaffirmed its fiscal 2015 guidance, investors seemed to be disappointed by sales growth.
Whole Foods thinks it can triple the amount of stores in the United States, but with an increasing amount of competition in the natural/organic foods space and “only” 10% growth in sales over the past 12 months, some analysts seem to be skeptical.
WFM Stock Charts
A quick glance at the multiyear weekly chart of WFM stock reveals this skepticism, as shares have struggled since topping out in November 2013. After a strong and steady rise off the late 2008 lows where the stock was a trend follower’s dream, Whole Foods ultimately got too far removed above its support line (blue arrow line) by autumn 2013 that gravity had to kick in — and it did.
In classic fashion, the too-steep slope led to an unkind correction that by May 2014 broke the stock violently below the 2009 support line. After it was all said and done, WFM stock had lost 40% of its value within a six-month time span before shares began to settle into a consolidation phase. By late 2014, Whole Foods stock again began to rally, but this rally failed where the bears liked it to — namely after a retest of the underbelly of the 2009 support line.
From this perspective, as a result of the lower high from earlier this year, WFM stock looks poised to retest its summer 2014 lows and possibly below.
After the May 6 earnings report, investors once again let WFM stock drop to the tune of 10%, which broke the stock back below its 200-day simple moving average (red line),which had served as a good reference line for the stock over the past couple of years. Over the past two weeks since the earnings-report selloff, Whole Foods has begun to consolidate in a healthy manner, right in between two still-unfilled gaps (see blue boxes).
This sets up a two-sided trade opportunity.
The weight as per the above chart is still pushing WFM stock down, but that could see the stock fill the rest of its up-gap from last November near the $40 area. This trade would trigger upon a push below the $42 area.
On the other hand, if WFM stock wants to bounce, it could well fill at least part of the down-gap from May 7. This trade would trigger upon a push above $43.50, which could see the stock move into the $46 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.
