Chart Analysis Of Walgreen’s Stock

This is an analysis of Walgreen’s (WAG) stock for a friend who is still holding a position. Since Walgreens reported earnings on September 29, we have the advantage of a recent earnings report, and therefore no near term surprises on that front. Let’s take a look at some charts.

The two year chart shows us that WAG is in a steep downtrend with no support below the current price. We can see significant resistance in the $31 area. Essentially, this is not a stock I would want to own. The main question is how do we reduce a currently-held position at the best possible price.

Taking a closer look at the six month chart below, we can draw a number of conclusions. We can see that WAG has seen steady selling since earnings on 9/29, with especially high volume in two of the last three days. Some potential positives and negatives relating to this chart:

- We hope the recent high volume indicates climax selling, marking an intermediate term bottom. It is encouraging that yesterday we did not close below Friday’s low, but less encouraging that we failed to close well above that low. We should consider that price to be important support, and plan to sell partial shares if price breaks below that level.
- WAG remains in a steep downtrend. On Tuesday, price rose to a high of 25.96 in morning trading, before selling off for the remainder of the day. That is bearish action, and should raise our caution level.
- WAG is quite oversold here. Considering the crisis state of the broader market, oversold conditions can remain over extended periods of time. However, stock price tends to gravitate toward moving averages. The 50 day moving average is currently at 33.21, indicating good potential for a bounce higher.
- WAG underperformed during Monday’s big rally. This is a less encouraging sign.

Looking at the 60 day chart, we can see the action in an hourly time frame. We can clearly see the declining trendline, as well as the attempt to stabilize at recent lows. If price breaks below these lows, there is no telling how much lower it may go. A break below these lows, coupled with the recent volume pattern, would indicate another round of significant selling. We can see a similar consolidation pattern in the 27.00 area, which subsequently broke down. I have placed some fibonacci retracements here to act as potential support and resistance areas. Essentially, I would not hold this stock below 23.00. If WAG can break above the trendline, we can look to sell shares around 27.00, and should consider that a pretty good deal under the circumstances. If we see price break above the trendline on increasing volume, we can re-evaluate, and consider holding for additional upside toward the 31.00 area.

The Walgreen’s price action truly demonstrates the value of technical chart analysis for the long term investor. The most important sell signal for WAG occurred on October 1, 2006, when price broke below a three-year consolidation zone on heavy volume (see below). Such a break is quite significant, and indicates a high probability of further downward price movement. Stocks displaying this type of price action (breakdowns out of long term consolidations) have a statistically poor chance of sustained upward price movement, and therefore are not good places to hold assets. We want to hold stocks that are trending higher, not those that are breaking down.

Under these circumstances, long term investors considering capital gains tax issues need to take the time to compute portfolio implications should price continue in a long-term downtrend. While many investment advisers advocate deferring capital gains taxes, there is no advantage to playing with the government’s money when stock prices are in a sustained fall.

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