Walmart Stock Could Test 2018 Low Without China Deal

Dow component Walmart Inc. (WMT) gapped higher in August, gaining more than 9% after beating second quarter profit and revenue estimates while raising fiscal year 2019 guidance. However, euphoria faded after a single session, giving way to a grinding pullback that has now entered its seventh week. The retailer's relative strength compared with other Dow stocks has taken a hit during this period, dumping Walmart into laggard status that could persist for months or years. 

Half of all Chinese goods coming into America are now subject to a 10% tariff that rises to 25% at year end, and the president may also impose fees on the other half. A 2016 report estimated that 70% to 80% of Walmart goods are imported from China, making the company highly vulnerable to a long and protracted trade war. More importantly, the company can't pass higher costs onto customers to maintain razor-thin margins due to their lower-class demographics.

The no-win scenario is especially frustrating for bulls because August earnings disclosed healthy same-store comps and a 40% uptick in e-commerce sales, with the surging U.S. economy translating into strong consumer spending. Other retailers reported similarly positive results, lifting the SPDR S&P Retail ETF (XRT) to an all-time high in late August. However, the group has pulled back since that time, with potential buyers worried about 2019 profit margins. (See also: JPMorgan Expects Trump to Tax 100% of Chinese Goods.)

WMT Long-Term Chart (2000 – 2018)

The stock returned to the 2000 rally high at $70.25 in 2012 and eased into a sideways pattern that persisted into a 2014 breakout. A healthy advance stalled at $90.97 just two months later, giving way to a failed breakout and downtrend that posted a four-year low in the mid-$50s in November 2015. A recovery wave ended in August 2016, right after the company completed the acquisition of Jet.Com, sharply increasing its e-commerce capacity.

Committed buyers took control in early 2017, lifting the stock to 2015 resistance near $80, ahead of an October breakout that posted an all-time high at $109.98 in January 2018. Walmart shares sold off with U.S. markets into February and kept hitting new lows into May despite a broad-based recovery. Relative strength improved into August, yielding an earnings-driven rally gap that reversed after hitting $100 at the opening bell. That uptick pierced but did not fill the Feb. 16 gap. (For more, see: These Are the Benefits of Investing in Walmart.)

WMT Short-Term Chart (2017 – 2018)

The stock has posted a series of lower highs and lower lows in the past seven weeks, but the bottom half of the gap remains unfilled. A Fibonacci grid stretched across the first half correction organizes price action, with the August buying spike ending right at the .618 Fibonacci sell-off retracement level. The subsequent decline pierced the .50 level and is now approaching the .382 retracement at $92.50, which is narrowly aligned with the 50-day exponential moving average (EMA).

On-balance volume (OBV) hit a multi-year high in January 2018 and rolled into a distribution wave that approached a nine-month low in June, signaling active profit taking. Minor buying pressure into mid-August barely dented the bearish volume pattern, with the one-day wonder rally marking a peak, ahead of fresh selling pressure into October. Despite the relentless downtick, neither weekly nor monthly relative strength indicators have reached oversold levels. 

Support near $93 should generate a multi-week bounce, but it will take considerable buying power and a more positive geopolitical environment to get the stock back above $100. It's more likely that the uptick will fail in the upper $90s, giving way to a secondary decline that fills the summer gap and tests the 200-day EMA near $90. Watch the June OBV low (red line) if that happens because a breakdown will predict the stock following suit and dropping back to the 2018 low. (See also: Amazon to Beat Walmart in Apparel by Year-End: Wells Fargo.)

The Bottom Line

Walmart's technical outlook has deteriorated since an August rally failed in a single session, generating bearish price action into the fourth quarter. A recovery effort is likely in coming weeks, but the retailer could fall to even lower lows into 2019. (For additional reading, check out: Walmart Patents Blockchain System for Automated Delivery Drones.)

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

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