Relative Weakness Bodes Ill For Wal-Mart

08/21/06 08:56:48 AM

by Arthur Hill

Wal-Mart bounced over the last few weeks, but stiff resistance is at hand and the stock remains an underperformer.

Security: WMT
Position: Sell

Let's look at relative strength for Wal-Mart first. Actually, I should say relative weakness. The top indicator shows Wal-Mart (WMT) relative to the Standard & Poor's 500 (Figure 1). This is a simple ratio plot of the Wal-Mart stock price divided by the S&P 500 value. The ratio rises when WMT outperforms and falls when WMT underperforms. Right now, WMT is underperforming. While the stock advanced back to broken support, the price relative traded flat and even moved to a new reaction low last week (red box). This is not a good sign for the king of retail and the price relative would have to break above the August high to reverse this trend.

FIGURE 1: WAL-MART. Wait for a move above 45.5 to negate the bearish prognosis.

Graphic provided by: MetaStock.

On the price chart, the stock broke support with a sharp decline in July and broken support turned into resistance. A gap down on high volume punctuated this support break. The stock rallied over the last few weeks and met resistance around 45–45.5 (scene of the support break and gap). Technically, the stock filled the gap. However, the reality of the situation is that stock has been stuck around 45 since the end of July and needs to break 45.5 to truly revive the bulls.

The pattern at work over the last few weeks looks like a rising flag. These are bearish consolidations that are confirmed with a break below the lower trendline and prior low. A move below support at 43.75 (green line) would signal a continuation of the early July decline and project further weakness below 40. Given poor relative strength, stiff resistance at 45.5, and the bear flag, the odds favor a support break and continuation lower. Watch for a move above 45.5 to negate my bearish prognosis.

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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