Dow component Walgreens Boots Alliance, Inc. (WBA) has rallied nearly 15% in the first three November sessions following reports that the $52 billion drug chain has held preliminary talks with private equity firms to "go private." According to Reuters' sources, many private equity firms don't like the idea, concerned about "business prospects and the challenges of financial the deal," raising doubts about whether speculative buying interest will pay off in the coming weeks. 

Walgreens stock has slumped badly through most of 2019, dropping into the bottom slot in Dow component relative strength. The bearish tide started to turn in June when it posted a six-year low and turned higher, while an August retest attracted committed buying interest. The subsequent uptick completed a double bottom reversal this week, setting off buy signals that could outlast the current speculative wave.

WBA Long-Term Chart (1990 – 2019)

Chart showing the share price performance of Walgreens Boots Alliance, Inc. (WBA)
TradingView.com

The stock cleared 1987 resistance at a split-adjusted $2.81 in 1990 and entered a strong uptrend that escalated into a vertical trajectory in 1995. Impressive gains continued into the 1999 high at $33.94, giving way to a narrow consolidation, followed by a rapid advance into the 2000 high at $45.75. That marked the highest high for the next five years, ahead of a broad trading range with support in the mid to upper $20s.

A 2006 breakout made little headway, stalling just six points above the 2000 peak. Aggressive sellers then took control, grinding out a steady downtrend that accelerated into a 10-year low during the 2008 economic collapse. The subsequent recovery wave took nearly five years to complete a round trip into the prior high, generating an immediate breakout and rally that reached an all-time high at $97.30 in the summer of 2015.

A broad double top pattern broke to the downside in 2017, establishing a persistent downtrend that posted lower highs and lower lows into the third quarter of 2019. The sell-off reached critical support at the narrow alignment between 2013 breakout and the .618 Fibonacci rally retracement level in April and tested that trading floor for six months before turning sharply higher into November. This bullish action raises the odds for a sustainable bottom and new uptrend.

The monthly stochastics oscillator dropped to the most extreme oversold technical reading since 2011 in the second quarter of 2019 and entered a buy cycle in August. The uptick still hasn't reached the overbought zone, predicting continued upside that could persist into 2020. However, a leveraged buyout also means that the stock would no longer trade, so profits on "buy and hold" positions will depend on an accurate guess of the buyout price rather than technical acumen.

WBA Short-Term Chart (2018 – 2019)

WBA
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A Fibonacci grid stretched across the vertical decline between November 2018 and September 2019 highlights an Elliott five-wave decline pattern, with equal-sized third and fifth waves. The fifth wave printed a seven-point breakaway gap, which got filled this week when the uptick broke out above the 200-day exponential moving average (EMA) and completed a 100% retracement into the March 19 high above $63. The $57 to $60 price zone should offer a low-risk buying opportunity in this set-up, while resistance in the mid-$60s slows or stalls progress.

The on-balance volume (OBV) accumulation-distribution indicator bottomed out in 2017 and entered an accumulation phase that posted an all-time high in November 2018. This bullish divergence indicates that dividend payments have kept the shareholder base at a high level despite the downside, underpinned by plenty of bottom fishing and value hunting. The stock is also a Dow component, benefiting from index fund buying pressure.

Short-term trades look more appealing than a buy and hold strategy at this juncture because we don't know if deal speculation will generate an actual buyout. In addition, a failure is likely to trigger a run for the exits by speculators, potentially generating a steep decline back into the mid-$50s. Even so, that downdraft might offer a buying opportunity because the majority of technicals indicate that Walgreens' long-term downtrend has come to an end.

The Bottom Line

Walgreens stock has taken off in a momentum rally in reaction to reports that it's seeking a leveraged buyout by private equity firms.

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