Dow component Wal-Mart Stores, Inc. (WMT) got blasted last week, dropping nearly 5% in a single session after Amazon.com, Inc. (AMZN) announced that it would purchase Whole Foods Market, Inc. (WFM) in an acquisition that greatly expands Amazon's digital grocery delivery systems. The sale poses a direct challenge to some of Wal-Mart's recent initiatives, which include employees loading up cars after customers purchase meat and vegetables online.
However, the rapidly disrupting landscape for food shoppers is large enough to benefit both mega-companies, suggesting that Wal-Mart's decline will offer a long-term buying opportunity ahead of a steady recovery and even higher 2017 prices. Amazon's aggressive moves will also put a fire under short-term business planning, forcing acquisitions or greater financial commitments to at-home delivery. (See also: Cowen: Wal-Mart, Costco Buys Despite Amazon Growth.)
WMT Long-Term Chart (1993 – 2017)
The stock led the broad market in the 1980s and 1990s, charging higher during a rapid expansion phase that put millions of small Main Street shop owners out of business. The historic uptrend entered a final phase between 1997 and 1999, when Wal-Mart stock gained more than 60 points into the last trading week of the 20th century. That peak marked the highest high for the next 12 years, ahead of a multi-wave decline that found support in 2001 in the low $40s.
That level marked a significant trading floor in subsequent years, holding through six deep tests between 2002 and 2007. The stock made little headway during this range-bound period, posting a series of lower highs that kept the longer-term downtrend fully intact. Contrary action took control in 2008, when the stock caught a strong bid due to significant loss of wealth in the U.S. population when the real estate bubble collapsed. (For more, see: Behind Wal-Mart's 102.57% Rise in 10 Years.)
Wal-Mart shares tested range resistance in the second half of 2009 and pulled back into 2011, ahead of a trend advance that finally broke multi-decade resistance in 2012. Shallow gains accelerated into January 2015's all-time high at $90.97, ahead of a steep decline driven by fears about market share loss to e-commerce. The company's significant commitment to online sales then took hold, triggering a multi-legged recovery wave ahead of last week's reversal.
WMT Short-Term Chart (2015 – 2017)
The 2012 breakout generated several years of sideways action at new support before rewarding shareholders with a three-month rally at the end of 2014. That uptick faded quickly in a decline that posted a failed breakout when it violated support at $71 in August 2015. The bounce into the middle of 2016 tested that level and failed it once again, ahead of a stronger 2017 buying impulse that should now resist aggressive selling pressure. (See also: Wal-Mart Orders Tech Partners to Get Off Amazon Cloud.)
The 2017 rally reached within a few points of the .786 Fibonacci sell-off retracement level at $83, which marks strong resistance. The decline knocked the price back under the .618 retracement (red line), establishing a second layer of resistance near $78. Not surprisingly, that marks the exact top of last week's gap, suggesting that a bounce will fill the big hole before sellers return in force. It also tells us that the next strong buying signal will ring once price remounts that level.
On-balance volume (OBV) entered a strong distribution wave after the January 2015 top, descending into October when the indicator and price bottomed out. Accumulation since that time has tracked price, with last week's high-volume decline triggering a notable downturn. The unusual speed of the decline tells us to expect slow progress in coming weeks rather than a quick return to recent highs. (For more, see: Exploring Oscillators and Indicators: On-Balance Volume.)
The Bottom Line
Wal-Mart sold off after Amazon's Whole Foods announcement but should bounce in coming weeks because the Arkansas-based retailer is perfectly positioned to mount a competitive challenge. New support between $70 and $71 should hold during a base-building process, supporting low-risk long-side entries that should benefit in the longer term. (For additional reading, check out: Wal-Mart's Biggest Threat Isn't Amazon.)
<Disclosure: The author held no positions in the aforementioned stocks at the time of publication.>