Prep for a Wal-Mart Stores Inc Pre-Christmas Breakout
Wal-mart Stores Inc (NYSE:WMT) shares are cobbling together quite the fourth-quarter rally. The consumer staple kingpin is up 25% since October began, bringing a rousing year-end rally to the ubiquitous retailer. Bulls deserve a hearty congratulation for turning what would have been a solid year of WMT stock gains into an outright barnburner.
Source: Mike Mozart via Flickr
But I don’t think the upside is done. The formula for additional gains is simple. Santa Claus + bullish technicals = rally into Christmas. The back half of December includes the so-called Santa Claus rally which has a strong tendency of bringing above-average gains to stock prices. Additionally, WMT stock looks like a beast on the technical front.
For starters, the retailer experienced two outsized up-gaps over the quarter, injecting newfound momentum into its uptrend.
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The pair of pops were accompanied by above-average volume suggesting institutions were piling in. The 20-day moving average has taken off like a rocket-ship to keep pace with the rapid price rise. And the 50-day and 200-day are following beneath like loyal puppies.
Source: OptionsAnalytix
The behavior since November’s positive earnings release has been particularly admirable. The entirety of the last month’s trading has remained within the range of the post-earnings candlestick. That’s some consolidation!
Like a coiled spring, the digestion packs a mountain of pent-up energy that could be released on the next breakout. The line in the sand worth watching is $98.40. Once it’s breached, I expect a quick move to $100 and beyond.
With earnings fading in the distance implied volatility for Wal-mart options has receded to a more modest level. That coupled with the consistency of its upward drift has me eyeing calendar spreads.
Buy WMT Stock Calendars
To capitalize on the continued upside, consider buying a March $95 call option. And to partially finance the purchase and reduce the overall risk, sell the Jan $100 call option as well. This creates a long March $95/short Jan $100 diagonal spread. The net debit is $4.28 and represents the max loss in the position. If WMT reverses lower then consider exiting the entire trade on a break of the 50-day moving average at $91.
The ideal outcome is to have WMT drift higher towards $100 by Jan expiration. I suggest exiting the position if you can grab a $1 profit. If you purchase the spread for $4.28, that means you’ll be looking to sell it for around $5.28.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
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