Walmart Puts Trendline Support to the Test

Modest option premium will allow for maximum leverage on WMT

Jan 14, 2020 at 12:25 PM
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Several Dow stocks have been featured in this space in recent months. The latest blue chip to catch our attention is Walmart Inc (NYSE:WMT), with the retail stock finishing last year right in the middle of the pack, gaining just 27.6% in 2019 -- tame compared to, say, Apple's (AAPL) 86.2% return. Nevertheless, WMT's climb higher last year was underscored by its rising 80-day moving average, and culminated in an all-time intraday peak of $125.37 on Nov. 14 (which occurred in reaction to Walmart's third-quarter earnings report and full-year guidance).

After hitting this notable milestone, WMT pulled back into year's end, and continued this move lower into 2020. While this retreat had the shares breaching the 80-day trendline, they are now testing their 120-day moving average, which has proven to be a steady layer of support in recent years. According to data from our Senior Quantitative Analyst Rocky White, the stock's recent test of this rising trendline suggests Walmart's next big move could be to the upside. More specifically, previous challenges by WMT of its 120-day trendline have yielded an average 10-day return of 4.94%, with 100% returns positive (based on five returns in the past three years).

Based on WMT's closing price of $116.38 on Friday, Jan. 10, this projects a move back above $122 over the next two weeks. Walmart has only topped this level on an intraday basis just once (back on Nov. 14), but has yet to tackle it on a closing basis.

Meanwhile, with the retailer's third-quarter earnings in the rearview mirror and fourth-quarter earnings not due until late February, implied volatility (IV) on WMT's short-term options is in a "sweet spot." The stock's Schaeffer's Volatility Index (SVI) of 14% registers in the 8th percentile of its 12-month range, meaning short-term IVs have priced in lower volatility expectations only 8% of the time in the last year. This suggests modest option premium allowing for maximum leverage.

What's more, with the SVI for WMT currently hovering near its two-year historical average, White's modeling forecasts that an "average" bounce from the 120-day moving average could translate into a significant 172% return on a 10-day at-the-money call option on the retail stock -- nearly triple the price to enter the trade.

Prospective call buyers could be encouraged by some lingering skepticism still levied toward the Dow stock. While 15 analysts maintain a "buy" or "strong buy" recommendation on Walmart, there are still seven brokerages sitting on the sidelines with tepid "hold" recommendations. Another bounce off the 120-day moving average could draw upgrades from the remaining unenthusiastic analysts.

wmt daily chart jan 10

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, January 12.


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