Dow component Walmart Inc. (WMT) rallied to a nine-month high in the triple digits ahead of this week's third quarter earnings report and sold off after the news, despite beating profit estimates and raising full-year guidance. The bearish reaction surprised many analysts but makes perfect sense, given a growing consensus for a 2019 consumer spending slowdown after the impact of 2018 tax cuts begins to wane.

China tariffs may also undermine Walmart's profits in coming months, despite improved pricing power, although executives said little about the potential impact during the quarterly release. Those duties are expected to rise from 10% to 25% at the end December, while the list of affected suppliers could double, affecting low-margin retailers like Walmart that buy massive quantities of goods from the Asian nation. 

In addition, the stock is no longer cheap, with the current valuation well above historical levels. Walmart has relied on a rapid expansion in e-commerce sales to drive growth in recent years, and that strategy has been paying off, with a 43% third quarter sales increase adding to profitability. However, that bright spot won't help much in 2019 if the economic expansion hits the brakes and company margins get squeezed by higher acquisition costs.

WMT Weekly Chart (2012 – 2018)

The stock cleared 12-year resistance in the low $70s in 2012 and took off in a healthy uptick that stalled near $80 a few months later. Three breakout attempts into May 2014 failed, generating a broad symmetrical triangle pattern that was finally mounted in November. The subsequent buying impulse was short lived, topping out at $91 in January 2015 and giving way to a downturn that failed the breakout three months later.

A 30% decline found support in the mid-$50s in November, yielding a recovery wave that completed a round trip into the 2015 high two years later. The stock broke out immediately, adding nearly 20 points into January 2018's all-time high at $109.98 and turning lower, settling in the low to mid-$80s in May. A bounce into the fourth quarter completed the next leg of a rounded correction that stalled at the .786 Fibonacci rally retracement level above $105 on Nov. 12.

A Fibonacci grid stretched across the rally wave that started in November 2015 places the 2018 decline right at the 50% retracement level and trendline of rising lows. The 2015 high, 50-week exponential moving average (EMA), .382 retracement, August 2018 gap and trendline are set to converge around that level in the second quarter of 2019, highlighting the importance of price action around $90. Shareholders can breathe easy until that level gets taken out and sets off larger-scale sell signals.

WMT Daily Chart (2017 – 2018)

This week's reversal unfolded at a harmonic level that's notorious for printing lower highs within double top patterns. For that reason, bulls should hope for a bounce to mount the November high quickly, opening the door to a test at the January high. The psychological $100 level should also be watched closely in the coming weeks because it may reveal the quality of buying power heading into 2019.

Unfortunately, the on balance volume (OBV) accumulation-distribution indicator predicts tough sledding for bulls, peaking in January 2018 and entering a distribution wave that ended in June. Buying intensity since that time has failed to match positive price action, slumping near summer lows. Traders should watch for a breakdown through the lower red line because that violation could set off an early but reliable sell signal.  

The Bottom Line

Walmart stock got sold after the retail giant reported strong third quarter results and raised guidance, suggesting that shareholders are concerned about 2019 profitability.

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