Dow 30 Technical Analysis and Trade Recommendation: Walmart

Technical Overview

  • From February 2017 to February 2018, Walmart’s stock enjoyed its most rapid ascent since the late 1990s, rising from $65 to $110. During this period, the stock bounced off a key support on several occasions (green trendline in Figure 1).
  • After gapping up in October 2017 (white arrow), the stock’s advance became near-vertical over the next quarter, eventually topping at $110.
  • The February correction, coupled with the company’s 4Q earnings release (yellow arrow), saw the stock plummet by nearly 22% by mid-March.

Figure 1. WMT Daily Chart

  • The November 2017 and January & February 2018 peaks formed a H&S pattern (tops – white ellipses; neckline – blue upward-slanted trendline in Figure 2), with the stock breaking below the neckline upon the release of its 4Q earnings (blue arrow).
  • Since early March, the stock oscillated within a 5-dollar horizontal trading range (violet trendlines) until finally breaking below the lower boundary on May 9 (violet arrow).
  • After breaking below the horizontal trading range, the stock found support at the $82 level (white horizontal trendline in Figure 1). The subsequent rally was short-lived as the stock halted at the 50 SMA (yellow line in Figure 2), and moved back below the lower boundary of the trading channel.

Figure 2. WMT Daily Chart

Implications

  • The implied minimum downward target from the H&S pattern was already met in May (vertical blue line in Figure 2).
  • The 5-dollar trading range activated an $80 downward target (not yet met).
  • The 3-month period of low volatility had brought down option prices, to now trade at roughly 17% IV. Traders should look for opportunities to buy volatility.
  • The minimum expected move by the stock in the short-term is to either meet its horizontal trading range target ($80) or retest the lower boundary of the trading channel at $85.
  • However, if the stock breaks above $85 (i.e. goes back within the channel) and the 50 SMA, it is quite likely to retest the upper boundary of the channel at $90. To the downside, if the stock breaks $80, a swift move lower can also be expected, potentially filling the two up-gaps from July 2017 ($75).

Trade Recommendation

  • Buy the $82.50, June 15 straddle for a debit of $2.70 – $2.80 ($1.42 for the call and $1.36 for the put as of the May 25 bid-ask spread midpoint).
  • Hold both options at least until the stock retests $80 or $85.  At this point, the straddle should be worth at least as much as it cost (i.e. at least $2.50 intrinsic value for the in-the-money option and some time value for both options). Based on price action, one of the two options can be sold at this time. Will publish a follow-up piece once the stock trades at either $80 or $85.
  • Target: $7.50 (i.e. the intrinsic value of the in-the-money option if the stock trades at either $90 or $75).

Featured image courtesy of Shutterstock.

Author:
http://www.linkedin.com/in/konstantindimov