Walmart Sellers in Control After Earnings Miss

Dow component Walmart Inc. (WMT) missed fourth quarter EPS estimates by four cents while reporting a 2.6% increase in comparative sales in Tuesday's pre-market release, triggering a modest slide after last week's oversold bounce lifted the retailing giant to a two-week high. A reduction in fiscal year 2019 guidance may keep buyers on the defensive in coming sessions and could generate the next leg in an intermediate correction that reaches the low $80s.

The stock broke out above 2015 resistance in October and posted a healthy series of all-time highs into late January. Market players exhibited enthusiastic buying interest in reaction to rapid online sales growth, with the company set to challenge internet juggernaut Amazon.com, Inc. (AMZN) on many retail fronts in coming years. As a result, a steep decline should offer a historic buying opportunity ahead of a long-term growth spurt and much higher prices. (See also: How Walmart Model Wins With 'Everyday Low Prices'.)

WMT Long-Term Chart (1993 – 2018)

The stock roared higher in the 1980s, driven by a rapid but controversial expansion into America's suburbs. The multi-year uptrend ended at $17 in 1993, giving way to a shallow but persistent decline that bottomed out at $9.55 in 1996. It turned higher into 1997 and took off like a rocket, gaining more than 60 points into the first trading session of the new millennium, when it topped out at $70.25.

The stock posted three deep lows in the low $40s during the bear market and failed to bounce into mid-decade, sharply underperforming the broad equity universe, and turned lower again in 2004. Three more tests in the low $40s finally established a long-term base in 2007, generating an upturn that reached the mid-$60s in September 2008. It held support during October's market crash, underpinned by wealth destruction that favored discount retailers.

A 2012 breakout above 2000 resistance failed to attract momentum buying interest, yielding more than two years of sideways action that ended with a quick burst above $90. The stock then sold off with the broad retail sector, undermined by the paradigm shift out of brick and mortar into e-commerce sales. The decline ended in the mid-$50s in November, generating a strong bounce underpinned by the acquisition of Jet.com providing a rapidly growing online presence. (For more, see: Wal-Mart Sees Returns From $3B Jet.com Purchase.)

WMT Short-Term Chart (2015 – 2018)

Buying pressure accelerated in the second half of 2017, yielding a breakout that continued to post new highs into January 2018. It sold off more nearly 13 points after hitting an all-time high at $109.98 on Jan. 29 and bounced back to $105 ahead of this week's earnings report. The stock is testing the $100 level ahead of Monday's opening bell, with that level likely to break and yield a test at the corrective low in the mid-$90s.

The Nov. 16 unfilled gap between $90 and $94.50 could act as a magnetic target in coming weeks, with that level now aligned with the 200-day exponential moving average (EMA) and breakout support. A more potent buying opportunity will come if that price zone breaks, triggering a capitulation that reaches much stronger support in the low $80s, where the stock has posted an unfilled gap between $81.50 and $82.50.

On-balance volume (OBV) ended a long-term accumulation phase in 2015 and lost ground into the first quarter of 2016. Buying pressure matched price action into January 2018, breaking out and posting a series of new highs. This broad sponsorship should underpin recovery efforts in the coming weeks, perhaps holding at higher support levels, but it is best to await volume data in the sessions following this week's poorly received earnings report. (See also: Walmart's New Weapon Against Amazon: The Cloud.)

The Bottom Line

Walmart stock is selling off after missing profit estimates and lowering annual guidance. An impressive 40% growth surge in online sales should ease downside pressure, but the stock is technically overdue for an intermediate correction that could reach the low $80s. (For additional reading, check out: The Top 4 Walmart Shareholders.)

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