Walmart Downtrend Nearing Major Support

Dow component Walmart Inc. (WMT) fell to a seven-month low earlier this month after the company announced a 77% stake in India's Flipcart. The Arkansas retail giant warned that the $16 billion transaction would require a debt offering and a 60-cent-per-share hit on fiscal year 2020 earnings, triggering an exodus of shareholders that were disappointed by the lack of online sales initiatives to compete with Amazon.com, Inc. (AMZN).

A healthy uptrend surged to an all-time high in the triple digits in January 2018, driven by strong online sales growth, but the stock plunged in February after the company reported weak fourth quarter earnings and disappointing profit guidance. The correction has now shaved nearly 25% off the share price, while the 200-day exponential moving average (EMA) has rolled over and become resistance, raising the odds that the stock has entered a major downtrend.

Fortunately for nervous shareholders, the four-month decline has now reached within five points of major support in the mid-$70s, suggesting a mid-year bounce that will test fresh resistance layers. During that reprieve, Walmart will need to convince skeptical market players that it can grow more quickly on this side of the Atlantic, or it will face aggressive selling pressure that could eventually dump the retailer's stock into the mid-$50s. (See also: Walmart Stock Could Be Set Up for Major Rally.)

WMT Long-Term Chart (2000 – 2018)

A four-year uptrend ended just above $70 at the start of the new millennium, giving way to a shallow but persistent downtrend that reached 1999 support in the low $40s in 2006. It tested that level three times into the second half of 2007 and turned higher, stalling at the 2002 swing high in the low $60s in September 2008. A decline during the economic collapse did little damage, finding support in the mid-$40s.

The stock tested that level four times into 2011 and turned higher, entering the strongest uptrend so far this century, posting a series of new highs into the first quarter of 2015 when it topped out near $91. It then turned sharply lower in sympathy with other brick-and-mortar retailers losing market share to e-commerce sales, bottoming out at a four-year low in the mid-$50s in November 2015. The subsequent uptick took nearly two years to complete a round trip into the prior high.

A November 2017 breakout stalled in January 2018 after the stock posted an all-time high at $109.98, while the subsequent decline broke new support in March. The stock has continued to lose ground into May and is now trading at a seven-month low in the low $80s. Meanwhile, the monthly stochastics oscillator has dropped to the oversold level for the third time in eight years, while price nears major support at the 50-month EMA in the upper $70s. These twin technical elements set the stage for a strong mid-year bounce.

[Check out Chapter 4 of the Technical Analysis course on the Investopedia Academy to learn more about determining whether a stock is overbought or oversold]

WMT Short-Term Chart (2015 – 2018)

A Fibonacci grid stretched across the 2015 into 2018 uptrend places the November breakout right at the .382 retracement level, while the March breakdown also violated the 200-day EMA. Multiple tests at new resistance failed to attract committed buyers, generating a steep downtick that is now testing corrective lows. Downside momentum appears to be growing, predicting a more rapid decline that could mark a selling climax.

The .618 retracement level has aligned at the rising low trendline and 50-month EMA in the mid- to upper $70s, highlighting a conflict zone that is likely to generate buying interest and an intermediate bottom. The upper $80s would then mark heavy resistance that is likely to attract aggressive short sellers if a bounce gets that high in the third quarter. On-balance volume (OBV) has carved a similar setup, suggesting that buying pressure will fail to exceed the red line. (For more, see: Walmart Reports Oversold and Below 'Death Cross'.)

The Bottom Line

Walmart is engaged in a steep correction that is likely to reach the mid- to upper $70s before generating a reversal that will run into a buzzsaw of resistance in the upper $80s. (For additional reading, check out: Walmart Buying 77% Stake in Flipkart for $16B.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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