Chart Says This Forgotten Blue Chip Is About to Rally
When a member of the blue-chip Dow Jones Industrial Average becomes a chronic underperformer, it often is at risk for removal from the index. Bank stocks after the financial crisis were prime examples. However, one laggard that should not worry about banishment right now is retail giant Wal-Mart (NYSE: WMT).
The world’s largest publicly traded employer has been lagging the domestic market since mid-2012 with a bout of strength seen in the fourth quarter of last year. Since notching its all-time highest close on Jan. 8 at $90.47, shares slid rather steadily to their March 11 closing low of $80.69. That was an 11% decline in eight weeks while the Dow was down just 1.5%.
With WMT sitting on top of a rather firm price floor, it may now be a great bargain. But it is more than just support on the chart that piques my interest.
The decline in shares this year seemed rather sedate — the steady erosion of a forgotten stock. And throughout the fall, on-balance volume did not budge, which is a bullish sign.
On-balance volume keeps a running tab of volume changing hands on up days minus volume on down days. The theory is that when bulls are more aggressive, volume on rally days expands, and on pullback days it contracts. I use it as a proxy for supply and demand for a stock, as well as a money flow indicator.
Most of the time, on-balance volume tracks stock prices. It is when the two diverge, even when one or the other is merely flat, that we can find opportunity. And that is what we see with WMT. While prices fell 11%, money did not flow out of the stock.
Thursday’s weak retail sales report curiously did not hurt the sector. The argument is that the market was already so depressed over the soaring U.S. dollar that a bounce was inevitable when the dollar softened. In fact, the retail sector was one of the better performers on the day, and that suggests weakness was already priced in.
WMT was technically oversold as it approached a strong support floor just below in the $79.30-$79.90 area. Strength in the sector in the face of weak news tells us retail is still in a leadership position. This brings me to my favorite setup — a lagging stock in a strong sector that is just starting to prove it can rally is a great buy candidate. To use an analogy, a rising tide lifts all boats as long as those boats are seaworthy. Wal-Mart just showed us that it is.
To be safe, let’s require that it spend at least two days rising before buying. A close above Thursday’s high of $82.12 would prove that the bulls are indeed coming back.
This should be a relatively short-term trade, likely lasting just long enough to capture the nice annualized dividend of 2.4%, with shares slated to go ex-dividend on May 6.
Recommended Trade Setup:
— Buy WMT on a close above $82.12
— Set stop-loss at $80.50
— Set initial price target at $88 for a potential 7% gain in eight weeks
Amplify Your Gains: Generate 83% From a 7% Stock Move
Using options, we can amplify WMT’s potential 7% move into a 83% gain. Specifically, we recommend buying WMT Jun 77.50 Calls for $5.75 or less.
This call option has a delta of 76, which means it will move roughly $0.76 for every dollar that WMT moves, but it costs a fraction of the price of the stock.
The trade breaks even at $83.25 ($77.50 strike price plus $5.75 options premium), which is 2% above current prices.
If WMT hits Michael’s upside target of $88, the call options will be worth at least $10.50 ($88 target minus $77.50 strike price). Once you enter the trade, place a good ’til cancelled (GTC) order to sell your calls at that price.
Profit Amplifying Trade Setup:
— Buy WMT Jun 77.50 Calls for $5.75 or less
If learning how to make profit amplifying gains like this on your own interests you, I can’t urge you enough to watch this interview. In it, one of America’s top options traders reveals his strategy on camera for the first time. It’s a technique that allowed him to retire wealthy at the age of 23 and continues to pay for his affluent lifestyle to this day.
— Profitable Trading Staff
This article originally appeared on ProfitableTrading.com: Chart Says This Forgotten Blue Chip is About to Rally