Wal-Mart At Critical Chart Levels Into Earnings (WMT, RTH)

Wal-Mart Stores Inc. (NYSE: WMT) was supposed to be the big winner of the Great Recession as the giant trade-down retail play for America.  Interestingly enough, the peak of the stock was almost 9-months ago long, before the last wave of major pain during the first two months of 2009.  And it has underperformed greatly since the March lows.  The S&P has rallied 50% from lows, yet today Wal-Mart is not even up 10% in the same apples-to-apples period.  Tomorrow morning will mark the company’s Q2-2010 earnings report, but traders better take this chart into consideration as there is a major inflection point nearing.  Based on this, we’d also be looking for a potential large move in the Retail HOLDRs (NYSE: RTH) ETF as well.

For starters, Thomson Reuters has estimates pegged at $0.86 EPS on just over $103 billion in revenues.  Throughout the earnings season and the spate of earnings and same-store sales reports from other retailers, analysts have made little change to estimates of late.  If Wal-Mart gives guidance for next quarter, those estimates are $0.80 EPS on $100.5 billion.

There is an obvious trend that has been hard not to notice in retail and in consumer staples.  Revenues are often coming up light, but earnings estimates are being hit or exceeded because of cost cuts and inventory management.  The big problem with that is that costs cannot be cut forever and inventories cannot go lower and lower through time.  Otherwise we end up at the same level of the state-run store issues of the old Soviet Union.

Unfortunately, options today are not indicating a massive move in the stock on a post-earnings basis.  Analysts are mixed on Wal-Mart, but an average price target is close to $60.00 with an implied 20% upside if that were to be hit.  But the chart is signaling that an inflection point could be upon us very soon.

If we look at the chart from StockCharts.com, Wal-Mart has been using its key long-term moving averages as a bumper car.  The 50-day moving average is $49.04 and the 200-day moving average is $50.49.  The stock is currently around the $50.50 mark.

Then if you look longer term chart at INO.com and start connecting the dots for longer-term highs and longer-term lows you will see that another inflection point is coming to a head.  Over the last nine months we have had a series of rolling lower-highs. Yet with the most recent time of early July we have also seen a series of higher-lows.  Throw in the recent performance and you have what appears to be the start of a challenge to real resistance on the upside. Wal-Mart has also started to look like it is at least moving outside of those downward trends.

We cannot predict the move based solely upon the charts.  All we can say is that an equal number of technicians on both sides will say how this represented a true break-out stock or that it was indicative of a false break-out pattern.  But what is becoming very obvious is that this stock is getting very near an inflection point that could set up a large move in either direction.

As Wal-Mart is over 21% of the entire weighting of the Retail HOLDRs (NYSE: RTH) ETF, we’d be keeping a close eye on that ETF as well as a backdoor trade into the world’s largest retailer.  A review of its chart over at StockCharts.com shows an entirely different picture for its 200-day and 50-day moving averages.

Wal-Mart reports early in the morning, and this report will likely set the tone for the entire retail and consumer staples sectors on Thursday.

JON C. OGG
AUGUST 12, 2009