Trading in Walmart Inc. (NYSE:WMT) is quiet on Thursday. The stock is consolidating after trending lower over the past two weeks. But that may be about to change.
It is oversold and approaching support. These dynamics could set the stage for a reversal and rally. This is why Walmart is our Stock of the Day.
‘Oversold' refers to a stock's momentum. If it has been aggressively sold and is below its typical range, it is oversold.
This is important because many trading strategies and styles are built on the concept of reversion to the mean. If something gets pushed too far in one direction, traders will anticipate a reversal or a reversion to the mean. Their actions could become a self-fulfilling prophecy.
For example, if a stock is oversold, like Walmart is, they will enter the market as buyers, and they may push the price higher.
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One of the most common ways to detect if a stock is oversold is the Relative Strength Indicator (RSI). There are two of these on the bottom part of a chart.
Most indicators, including RSI, have default settings. The RSI's default time period is 14. It compares where a stock is now to where it was 14 time periods before.
With this setting, Walmart does not appear to be oversold. This is because 14 days ago, the price was close to where it is now.
If the setting is changed to 5 time periods, as it is on the RSI at the bottom of the chart, you can see that in this timeframe, the shares are oversold.
Walmart is also getting close to a possible support level. $101.40 was support a few weeks ago, and it may become so again.
There tends to be support at former support levels because some who sold there later regretted it when the price rallied. Some of them vowed to buy their shares back if they could get them for the same price they were sold for, and this buying could create support again.
The combination of being oversold and at support means there is a good chance Walmart reverses and heads higher.
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Photo: Shutterstock/Iryna Tolmachova
