The retail sector got clobbered last week after major department stores posted weaker-than-expected quarterly results, raising fears the multi-year exodus out of brick and mortar into e-commerce sales is picking up steam at a rapid pace. Mall anchors posted double-digit percentage declines during the multiday route, putting a dead weight on more resilient players that had so far avoided heavy selling pressure.

This price behavior marks a dangerous preamble to this week’s Wal-Mart Stores, Inc. (WMT) confessional, forcing market players to consider hitting the sidelines ahead of the news to avoid getting caught in another downdraft. Even so, the sector has reached extremely oversold levels after last week’s stomach-churning decline, raising odds the retail giant will gain ground as long as it doesn’t warn about dire times ahead.

WMT Long-Term Chart (1994–2017)

WMT

The Dow component emerged as a market leader in the 1980s, with their megastore concept catching fire while putting thousands of Main Street storefronts out of business. It posted just a single decline over a 9-year period that started in the mid-80s, plunging with U.S. markets during the 1987 crash. The stock regained its footing quickly, entering a fresh round of new highs starting in 1990.

The rally topped out in 1993, giving way to a multiyear rounded correction that ejected into a new uptrend in 1997. That impulse peaked at $70.25 in the first quarter of 2000, just before the bubble burst in the Dot-com bear market. Keep that level in mind because it took more than 12-years for a return trip and breakout. Sellers also failed to move the needle during this dull period, with declines finding willing buyers in the lower-40s.

The stock returned to the prior decade’s high in 2012 and broke out, but momentum failed to develop, yielding choppy sideways action on top of new support, ahead of a 2014 rally wave that reached an all-time high at 90.97 in January 2015. It then turned sharply lower, with shareholders losing faith due to growing market share at Amazon.com, Inc. (AMZN) and other Net juggernauts.

WMT Short-Term Chart (2015–2017)

WMT

The 2012 breakout (blue line) failed during the August 2015 mini flash crash, yielding lower prices into November, when selling pressure ended near $60. The subsequent recovery wave stalled at the 50% selloff retracement in August 2016, giving way to a pullback that straddled the breakout. Buyers finally took control after the November election, lifting the stock just below the .618 retracement level, ahead of last week’s selloff.

Technically-speaking, this is a dangerous spot because price action hasn’t confirmed a breakout above last year’s peak with a successful test or basing pattern. That omission opens the door to a double top and reversal that could yield a decline into the January 2017 low at $65.28. Conversely, a relief rally could reach the lower-80s, where stronger harmonic resistance is waiting to test the resolve of newly minted bulls.

On Balance Volume (OBV) peaked in 2013 and tested the high in the first half of 2015, ahead of an aggressive distribution wave that hit bottom in August 2015. The indicator gained ground into the summer of 2016 and has ground sideways for the last 11 months (green line) even though the rice has lifted to the highest high since May 2015. This signals a bearish divergence, giving bears the upper hand heading into this week’s closely watched results.

The Bottom Line

Wal-Mart reports earnings on May 18 while sector sentiment has fallen to highly negative levels in reaction to a string of reduced guidance from major mall anchors. The report from rival Target, Inc. (TGT) one day earlier could set the tone, telling nervous shareholders to pay attention if they’re thinking of getting out prior to the news.

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

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