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


  • 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.