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Walmart stock ‘difficult to recommend’ as it nears resistance levels: Technical analyst

Ari Wald, Oppenheimer managing director and head of technical analysis, joins Yahoo Finance Live to break down the technicals of Walmart and Target stocks.

Video Transcript

AKIKO FUJITA: Well, retailers are feeling the pressure as they look to keep up with shifting consumer behavior and spending amid economic headwinds with inventory levels, margins, and pricing power all key indicators to watch. Here for further insight in the retail space is Ari Wald. He's Oppenheimer managing director and head of technical analysis.

Ari, it's good to talk to you today. Let's start with Walmart. We were talking earlier that some of this was kind of an expectations game because Walmart had put out that profit warning before their earnings. What stood out to you in the results we got today?

ARI WALD: The upside move in the stock share, yeah, I think on that warning that we saw last month, where it initially sold off, shares got scooped up. I think that was indicative of resilience there. Now we're seeing the upside move in the share price post-earnings. And I think it really just exemplifies the ongoing recovery that we're seeing in the market.

I think there is some staying power here. I think it's a little bit more difficult to recommend the stock, as it pushes into resistance levels. Generally speaking, the stock has traded in a more listless and rangebound manner for much of the last two years. A lot of resistance at the gap that was created when it sold off in May as well.

So right here, right now, it's testing its 200-day average at 140. That gap extends up to 145. I think you're likely to see some profit taking as we push into this resistance range, but ultimately looking for a higher low. And I do expect pullback to be bought as we're thinking about the next coming months and even quarters.

BRIAN CHEUNG: Ari, it's Brian Cheung here. When we rewind to May because I feel like that's such an important part of the storyline for the retail stocks, we saw a lot of other movement in other stocks as well. Obviously, Target had disclosures of their own, but we saw a lot of the, let's say, for example, Dollar Trees, Dollar Generals also move as well. How disruptive was that to some of the technicals that you're looking at here and whether or not the bouncebacks that we're seeing because maybe the bar got lowered from the guidance has actually been moved?

ARI WALD: It really was-- it was-- I think that's a big difference between now and then. It was a very market-- a broad market pullback that we saw that was a headwind weighing on that industry, a cyclical area of the market. It was a drag in particular, especially the higher growth pockets of retail. And I think that's an important part of this retail group is where-- what subset we're looking at. Select areas held up better than others.

And now, as we look at what is leading on the way back-- on the move to the upside, it's a lot of the beaten up prior laggards, low momentum stocks, which is consistent with a new bull market. You see a lot of these online retailers, the higher growth pocket of that industry that got beaten up, a name like Etsy now inflecting higher.

So, again, I think consistent with the start of a new bull cycle, you got auto retailers, a subset where you're really seeing broad-based leadership. I think you stick there as well. Even home improvement retailers like Home Depot and Lowe's up big today. To us, that's the type of strength that I think has staying power, again, as this recovery continues to develop.

AKIKO FUJITA: What about a name like Target? I mean, that's the next big-- big box retailer, if that's the right description these days, that we're looking to this week. I mean, a lot of the stories that we've heard are sort of similar to what we've heard from Walmart, concerns about inventory levels, tradedowns that are happening among consumers. What do you like or what are you worried with that stock?

ARI WALD: Yeah, this is one that was more damaged on the way down. And I think it exemplifies one that's snapping back, but probably similar to Walmart, where you have to question the long-term staying power. It's a stock that's coming into formidable resistance at its prior breakdown levels. There's a big gap in the stock there. So it's snapping back from some oversold conditions, but I would side that this is one you're thinking about reducing exposure to, as it continues to move higher into that resistance.

BRIAN CHEUNG: And then I want to ask broadly speaking, right, I think for anyone that's invested in the market, retail stocks are not the question, is, have we reached the bottom. You've seen some commentary. We've gone from apocalyptically bearish to patient bears out here. Do the technicals kind of support either argument there, that we have or have not reached the bottom?

ARI WALD: Our work is that we have reached bottom, that this is a market recovery. I think it's important to rewind the clock and look at how washed out we were in that June period. Only 14% of NYSE stocks were above their 200-day average. That is consistent with capitulation. That's a full surrendering of the market. You had the defensives sell off at that point. The bear cycle came for the energy stocks, too.

And since then, we've seen this re-broadening of the market and very consistent with how the equities typically trade around the mid-term year seasonal pattern, where you'll typically see a very difficult first half of the year. The third quarter usually characterized by base building, followed by a breakaway move in the fourth quarter. So we've been following that roadmap, and we're sticking with that roadmap. We think this is the start of a new bull cycle.

We've run up a lot over the near term. The S&P 500 is testing its 200-day average at around 4,300 right now. It's a level that could cause a little bit of a near-term pullback. But Brian, we're expecting a higher low. We don't think we-- we're not a lower low, not even a move back to that, what we saw in June. I think you're going to see a lot of investors that missed out on this move. There was just so much investor bearishness at that period that they're going to be looking to scoop up shares on even a minor pullback ahead of that fourth quarter.

BRIAN CHEUNG: Well, we'll have to follow up on that higher low call there. Ari Wald, Oppenheimer managing director and head of technical analysis, thank you so much for stopping by. Appreciate it. Coming up on the side-- on the other side, we'll speak with White House National Economic Council--