Wal-Mart Runs Into A Wall

12/01/05 09:36:49 AM

by Arthur Hill

Despite a great run over the last two months, Wal-Mart has merely returned to broken support, with a real test of bullish resolve looming.

Security: WMT
Position: Sell

I last wrote about Wal-Mart (WMT) on February 14, 2005, and highlighted the distribution patterns at work and relative weakness. These led to a big support break in March, and the stock moved below 45 in October. However, the stock rebounded sharply over the last few months and is once again challenging 50 (Figure 1). Have the bulls taken over? Or is this just a bear market rally?

FIGURE 1: WAL-MART. The stock has rebounded sharply over the last few months and is once again challenging 50. Are the bulls taking over, or is this the start of a bear market rally?

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

Broken support turns into resistance. This is a classic tenet of technical analysis, and the stock broke support at 51. This level turned into resistance in July and again in November. The rally from below 45 was certainly impressive, but the stock must at least take back the support break to undo the last bearish signal. As long as 51 holds, I view this as a bear market rally.

In addition to resistance at 51, there is also the trendline extending down from March 2004 that marks resistance at 53. This trendline sets the bearish tone over the last 18 months and also needs to be broken.

With the stock at resistance, I decided to check in on momentum to see if the stock was also overbought. Guess what? The 14-period stochastic oscillator moved above 80 (overbought) on November 18, and this indicator is now overbought. Except for April 2003 (blue circle), the stock peaked soon after the stochastic oscillator moved above 80. With broken support still holding, the stochastic oscillator overbought, and a failure to hold above 50 this week, I think Wal-Mart will fail at broken support and the bigger downtrend will continue.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Wal-Mart Runs Into A Wall

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