Wal-mart Stores Inc (NYSE:WMT) shares are cobbling together quite the fourth-quarter rally. The consumer staple kingpin is up 25% since October began, bringing a rousing year-end rally to the ubiquitous retailer. Bulls deserve a hearty congratulation for turning what would have been a solid year of WMT stock gains into an outright barnburner.
But I don’t think the upside is done. The formula for additional gains is simple. Santa Claus + bullish technicals = rally into Christmas. The back half of December includes the so-called Santa Claus rally which has a strong tendency of bringing above-average gains to stock prices. Additionally, WMT stock looks like a beast on the technical front.
For starters, the retailer experienced two outsized up-gaps over the quarter, injecting newfound momentum into its uptrend.
The pair of pops were accompanied by above-average volume suggesting institutions were piling in. The 20-day moving average has taken off like a rocket-ship to keep pace with the rapid price rise. And the 50-day and 200-day are following beneath like loyal puppies.
The behavior since November’s positive earnings release has been particularly admirable. The entirety of the last month’s trading has remained within the range of the post-earnings candlestick. That’s some consolidation!
Like a coiled spring, the digestion packs a mountain of pent-up energy that could be released on the next breakout. The line in the sand worth watching is $98.40. Once it’s breached, I expect a quick move to $100 and beyond.
With earnings fading in the distance implied volatility for Wal-mart options has receded to a more modest level. That coupled with the consistency of its upward drift has me eyeing calendar spreads.
Buy WMT Stock Calendars
To capitalize on the continued upside, consider buying a March $95 call option. And to partially finance the purchase and reduce the overall risk, sell the Jan $100 call option as well. This creates a long March $95/short Jan $100 diagonal spread. The net debit is $4.28 and represents the max loss in the position. If WMT reverses lower then consider exiting the entire trade on a break of the 50-day moving average at $91.
The ideal outcome is to have WMT drift higher towards $100 by Jan expiration. I suggest exiting the position if you can grab a $1 profit. If you purchase the spread for $4.28, that means you’ll be looking to sell it for around $5.28.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
