Why I’m watching it as a long play today: Wal-Mart went in to a red freefall Friday, along with most grocers and retailers. Of all names taking the hit, WMT surprised me most due to their large market cap. Now, while it’s early, the stock is up pre-market, in the early stages of dip buying, likely from overseas trading.
Moreover, while WMT got beat up on Friday, it actually closed showing a hammer candle on the daily chart, which to many is a bull flag going into the following trading session.
Should the Dow stay in bull mode, WMT could see a “gap-down reversal play;” a lot of traders – myself included – love these. If WalMart breaks back through its 50-day simple-moving-average line of $76.50, it could fill the red gap from Friday. Again, gap down reversal.
Why I’m not shorting it today: If markets fall apart after Friday’s weak showing, WMT has room to gap down even further to the 200-day simple-moving-average line of $70.68. Plain and simple, that’s what short sellers look for.
I won’t be short WMT because I missed the opportunity. Hey, I was busy taking profits on two other open swings when the short-selling opportunity presented itself last Friday, so no complaints. Don’t have FOMO, “fear of missing out,” just stick to your discipline and patiently move on, which today means going long.
How I might play WMT today: First of all, I’ll wait until after 3 p.m. to decide. Why? I want to see another hammer candle, indicating to me that the gap-down reversal is turning into a continuation pattern, a picture-perfect chart for those who want to go long. I won’t buy the stock, but the July 21 at-the-money call options which, per pre-market analysis, would cost about ninety cents per contract. The delta, or rate of change on these options, is thirty cents, meaning if WMT stock goes up $1, my call options increase in value by thirty cents, providing me with a +30% gross return on a potential swing trade. My stop-loss would be WMT’s break of its previous close, which is $75.24.
Davis Martin is the publisher of DailyProfitMachine.com. He trades SPY calls and puts, and swing trades mid- and large-cap stocks and stock options. At the time this article was published on RagingBull.com, he had never in his trading career traded WMT stock or stock options. As mentioned, he will be watching the stock’s option price action at/after 3 p.m. EST today.
If you want to learn more about options and why they are essential to leveraging your portfolio, register for this webinar as soon as possible.