Whole Foods Market, Inc. (WFM) Stock Primed for Bulls

It’s time to check out Whole Foods Market, Inc. (NASDAQ:WFM) as a stock collar buyer following a lengthy checkout line in WFM over the last couple years. Let me explain.

Whole Foods Market, Inc. (WFM) Stock Primed for Bulls

Whole Foods recently did the impossible … well, improbable at least. In the face of a barrage of concerns ranging from food deflation, increased competition from the likes of Kroger Co (NYSE:KR) or Sprouts Farmers Market Inc (NASDAQ:SFM) and in tow, weaker or less healthy margins, WFM stock delivered a profit beat.

The WFM corporate confessional wasn’t perfect. Most glaring, same-store-sales dipped by a larger-than-forecast 2.6%. Street views called for a decline of 2%. Overall though, Whole Foods managed a decent report all things considered.

Sales of $3.5 billion matched estimates. Earnings of 28 cents topped views by 4 cents and management announced a token half-cent nudge to WFM’s quarterly dividend to 14 cents.

Net, net it’s our determination WFM’s earnings report didn’t bag bulls. And while some analysts are still saying Whole Foods is a “sell,” the stock chart is also suggesting it’s time to check out WFM as a long position.

WFM Monthly Stock Chart

Source: Charts by TradingView

I’ve switched gears in WFM. Back in September and during a fourth test of support near $28 and multiyear lows, I saw the continued weakness in Whole Foods shares as a bad omen.

In and of itself, multiple testing of a price level can spell bad news. In addition, a failure by WFM stock to rally as the broader markets hit fresh highs appeared to warn of lower prices ahead.

I was wrong. But in taking a fresh look at the monthly chart, I uncovered a couple strong reasons why Whole Foods may have held and looks poised for a bullish 2017.

On the longer-term time frame and as shown in the provided WFM chart, Whole Foods shares have put together a very strong test of a key retracement level while completing a Fibonacci-based price pattern.

The multiple tests I had been concerned with on the daily chart near $28 was actually confirming both a 62% retracement from the 2008–2013 Whole Foods price cycle, as well as finishing a Fibonacci-based two-step or mirror move pattern.

Now and with shares confirming a bullish monthly candle signal and testing the 200-day simple moving average on a modest pullback — it’s time to be bullish in WFM.

WFM Stock Long Collar Strategy

Using the monthly chart as our guide, I like the idea of WFM as a core holding in anticipation that its three-year correction is complete. One way to do this with limited risk and a good deal of flexibility in being able to ride a potential trend higher is using a collar on Whole Foods shares.

Reviewing the Whole Foods options board, the Feb $28 put/$35 call collar is attractive. Priced for $31.16 mid-market versus $30.96 in shares of Whole Foods, this strategy allows the trader to have a guaranteed stop loss below $28 and where we’ve determined key support to exist.

Initially, the collar in WFM sacrifices potential upside to $35 a share, as the position has sold the call at this price level. Selling this call is intentional, as it slightly skews the position’s upside potential to nearly $4 versus downside risk of just over $3 a share. Further, option prices are somewhat pricey right now, so selling some premium makes sense.

Also, as our expectations are for a rally, but not necessarily an aggressive push higher through the $35 call strike, the sale is an effective way to finance the bulk of the protective put.

Lastly, should Whole Foods move higher and make a move through the call, the trader can consider rolling “up and out” the existing collar. By making this type of adjustment the collar position can continue riding an anticipated bullish price trend in WFM stock and in turn increase profits along the way.

Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.

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