While the S&P500 has been hitting all-time highs for most of the year, Whole Foods $WFM has been doing the exact opposite. Coming into the second half of the year, this has been one of the worst performers for 2014. But with this many bullish momentum divergences on so many different time frames, I think this risk vs reward down here is very much skewed in favor of the bulls. Here’s what I see:
The first chart shows the weekly bars going back almost 10 years. What stands out to me here is the former resistance back in 2005 that can potentially turn into support here. Our polarity principles tell us that the former supply could potentially turn into demand at these levels. I emphasize potentially, because that’s all it is, a potential. But simultaneously, we’re seeing a slight bullish divergence in momentum at these recent lows with what is still a rising 200-week moving average. It’s hard to be short here based on all this evidence:
Looking shorter term, I see a stock trading 25% below its 200 day moving average. The further away price gets from its mean, the higher the likelihood that the mean reversion process will begin. I think based on this bullish momentum divergence that we are also seeing on the daily chart, the chances of this mean reversion getting going are high:
The 200 Day moving average is the first target. But keep in mind that this is a “moving” target and declining quickly. In all likelihood, I can see a scenario where we fill that gap from May which take us near 48. But then the 200 day will likely be down near those levels making it hard for prices to break through. I’d be taking profits there and then reevaluating the scenario.
From a risk management standpoint, I would only want to be long this name above the May/June lows. Below that and things get messy putting these bullish divergences in jeopardy. Above that and the bullish momentum divergences remain intact.
There are a few other positives that I think are worth pointing out. Number one if you don’t like the market here, $WFM actually has a negative correlation with the S&P500 over the last month (-0.53), over the last quarter (-0.35) and over the last year (-0.76). So it clearly hasn’t moved with the overall market. We like that. Also, the short ratio is up near 6, the highest level in over a year (how many days it will take to cover all the shorts based on the average daily volume). Of the 35 sell side shops that cover $WFM only 16 of them (46%) have a buy recommendation. So we know this name isn’t exactly loved by the sell side; another positive.
So there’s a lot going on here: Bullish momentum divergences on daily and weekly time frames. There is a bullish divergence in relative strength as well. So when I see a hated underperformer diverging positively on so many levels and time frames, I have to pay attention. It’s hard not to like the risk/reward here.
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- Reblogged from All Star Charts- J.C. Parets