A mighty battle is transpiring in Walmart Inc (NYSE:WMT) shares. The ubiquitous retailer has been floundering following a disappointing earnings report, but buyers are finally making a stand. The location of the skirmish isn’t a coincidence. It’s directly on top of the oft-watch, yet sluggish 200-day moving average. With the victor of the contest about to be confirmed, the time for a Walmart stock trade is nigh.
The weekly view of WMT reveals the depths of the ongoing downturn. You’ll recall that the stock rocketed higher in the back half of 2017 on a moonshot to $110. This year’s unraveling has matched the speed of the ascent.
With yesterday’s intraday plunge, Walmart stock has now fallen 22%. We’re talking a straight-up bear market. But here’s the deal. With the rest of the market still firmly in a bull market, I’m willing to bet against WMT falling much further.
Myriad support levels loom close, and the stock has already fallen too far too fast. That means a rebound of some sort should be coming.
As we turn to the daily chart, the reason for Walmart’s recent tug-of-war becomes clear; buyers have swarmed in force to defend their beloved 200-day moving average. They’ve halted the bears’ advance for two weeks now and yesterday’s failed breakdown may finally spell victory. The false support breach that carried WMT below the 200-day for an hour suckered in short-sellers aplenty. With this morning’s bounce back these poor saps are now squealing in pain. Their suffering could eventually lead to an upside ramp as they run (and buy) to cover.
The WMT Trade
To bank on continued bottoming action in WMT, sell the April $82.50/$80 bull put spread for around 45 cents. Consider it a wager that Walmart can stay above $82.50 for the next month.
If it does, you will capture the 45 cent premium. Since the initial cost is $2.05, we’re talking about a respectable return of 22% with a high probability of success. If you want to increase the odds further, try scaling-in. Sell half of the position now at 45 cents, and add the second half if the value rises to 65 cents. This will lift your average credit which widens the profit zone.
Finally, if you want more upside confirmation before pulling the trigger then wait for a break of $89 to signal buyers have wrested control.
As of this writing, Tyler Craig held bullish options positions in WMT. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
