We are of the opinion that WMT has been accumulating since at least early 1994. A big upside move may be in the making, and we are tuned to the long side.
Nevertheless, tipped off by WMT's recent relative weakness, we liquidated our long position. But we are not ready to sell short. To take a short position against our longer-term bullish view would require evidence that strong hands are selling.
The breakout above 13 1/2 at K induces weak traders to cover shorts and to go long. A quick decline off the highs traps breakout buyers going the wrong way. But volume remains moderate on the decline, and the reaction appears normal. Price consolidates between 12 and 13 as volume eases. These are indications that WMT could be reaccumulating for a short-term rally attempt. But bullish indications are offset by the stock's persistent relative weakness. Until evidence tilts decisively to one side or the other, we will remain neutral.
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The stock does indeed rally, but immediately encounters the heaviest volume in a year on the slight breakout to L. The effort (volume) required is large given the small net advance. The high-low spread compresses. Although price makes a recovery high at L, this is almost certainly a shakeout intended once again to trap break-out buyers and trigger the buy-stops of traders who are short.
The chart of WMT's relative strength confirms these bearish indications. The relative decline from the high at K has been far more severe than that indicated by nominal price action. RS has broken to a new low, and the nominal recovery high at L (above) is not confirmed.
To be successful over the long run, traders must be flexible enough to follow the evidence of the tape, wherever it leads and without bias. Despite longer-term bullish signs of accumulation, the confluence of negative indications now makes a bearish case for the short- to intermediate-term.
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What downside target(s) are reasonable? Point & figure charts again provide an important tool; but we must first decide on the size of the point & figure reversal we should use to construct our chart. Given the low price of WMT, choice of a large reversal might not pick up sufficient detail to be of much use.
For our immediate purpose, we settle on a 1/4 point reversal chart. We prove the validity of this scale by testing earlier counts and the resulting targets. Using one-quarter point reversals seems to have worked well up to this point (see below), a fact which gives us confidence that we have chosen the appropriate scale.
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The chart below shows that a first count of 8 columns taken at 13 1/2 gives a downside target of 11 3/4, a level of previous support. A second count across 12 1/2 targets somewhat lower support at 11.
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With the stock trading at 12 1/2, a target of 11 offers a profit potential of only 12%, about the minimum required to take the trade. But the near-term technical condition of the stock is weak and the setup for the short-sale is clear. We sell short at the market near L, but keep the size of the trade small.
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The next chart shows that volume remains moderate on the decline; price is falling easily with little sign of support. At 11 3/4, our first target (see arrow), price gaps down and then recovers briefly. If support were active at this level, volume would increase as buyers become more active. But volume remains quiet. Lacking evidence of more than passing support, we decide to hold our short position.
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Price drops through this modest support on widening spread as WMT approaches our next target of 11. On the break to M, volume increases significantly. Our second target (11) has now been met, and high volume is evidence that buyers are actively engaging panicky sellers. We are also at a level which has provided strong support in the past. We are in territory controlled by strong hands.
Based on the evidence of active support at M, we close half of our short position. Before covering the balance of our position, we want to see some indication of a turn. WMT rallies strongly out of the low (M), and we cover the remainder of our short position at the market.
A corrective rally to N recovers nearly one-half of the decline from K to M. The rally peters out on low volume before price falls back to test support at 11. Volume picks up on this test, and we conclude that buyers are again active near the lows. A quick rally is followed by another decline to support just above 11. Volume falls off in a way that suggests that sellers may be tiring.
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After the climactic selling at M, WMT has tested support above 11 twice, each time on decreasing volume. These are bullish indications. Supply is being absorbed. Now is the time to watch carefully for a buying setup.
Often, just before a rally begins, volume dries up as the high-low spread narrows. A period of quiet trading after a buying or selling climax often demonstrates that the battle between buyers and sellers is over. If we see this kind of tight trading near support we are ready to take a long position on the first indication that the stock is beginning to rally.
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Instead, we are surprised by a gap to a new low (O) around 9 1/2. This decline breaks all support established over the last three years' trading. Is this a bullish shakeout or the beginning of a new bearish offensive?
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In either case, there is no trade to make. Even if we conclude that there is more weakness ahead, this is not a favorable point to initiate a short position. The stock is stretched to the downside and some distance from overhead supply. Our practice is to short weak stocks only on a rally, and then against a zone of supply which has demonstrated strong-handed selling. On the other hand, if this is a bullish shakeout, our practice is to wait for evidence that the trap is closing before taking a long position.
If this is a terminal shakeout, it is very bullish. The gapping break to O shattered long-term support and no doubt scared out all but the most courageous and committed bulls. Weak traders who might have waited to sell on a rally have, instead, now been forced out on the break to new low prices. Any rally from this point should encounter relatively light supply, and higher price levels which previously turned back rallies may now prove less formidable. A break of important support after a period of accumulation often signals the end of accumulation and sets up the markup phase.
Strong-handed accumulation has been in evidence going back to early 1993. The upside targets implied by such a long basing period are significant. Taken together, weakened overhead supply and long-term accumulation are a powerful argument for a durable advance in WMT.
However, we cannot be confident that this is a bear trap until a rally back above broken support signals that the trap is closing.
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A check of WMT's relative strength shows that the decline from K to O has been devastating. Relative price has become oversold near the support line of its downtrend. While an interesting technical development, evidence that a weak stock is oversold is, by itself, not sufficient reason to take a position. We remain neutral.
The bear trap closes with a bang as price snaps back through the gap left on the way down. A gap leaves a trading vacuum, a "hole" in the price structure of a stock. Since there are no buyers as the stock gaps down, there are no get-even sellers for buyers to contend with as the stock moves back up through the gap. When price returns through a previous gap, particularly if the gap is recent, the move through the gap is likely to be quick.
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This is the case as WMT rallies from the shakeout (O) through the gap created on the way down. This action closes the trap very quickly, catching weak traders with flat or short positions. To correct their errors, these sold-out bulls must chase the stock as it rises. Their buying will only add to the urgency of any rally.
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After the rally fills the gap, price backs up to long-term support around 10 1/4. The stock is now more volatile than it has been for months, and the spread on the test is wide. WMT rallies briefly again before easing back to higher support at P. Spread narrows. Easing volume tells us that selling pressure is modest. The stock is quieting down on a test near solid support just above 10. We take an initial long position at P.