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Costco Wholesale (COST) reports earnings after the close on Thurs., May 30. The stock remains below its quarterly pivot at $245.63 which it gapped below on Wednesday. My call is to avoid the stock now and buy on weakness to its annual and semiannual value levels at $224.96 and $213.09, respectively.

The technical reason for caution is that when the stock set its all-time intraday high of $251.01 on May 22, its weekly slow stochastic reading was above 90.00 as an "inflating parabolic bubble," which is a warning to reduce holdings.

Costco operates members-only wholesale warehouses for buying consumer goods in bulk. There are two levels of annual memberships: $60 for Gold Star and $120 for Executive. The gas stations associated with the warehouses also drive foot traffic inside the stores. The stock is not cheap, as its P/E ratio is 32.07 and dividend yield is just 1.05%, according to Macrotrends.

Analysts expect Costco to earn $1.83 per share when it reports after the close on May 30. Brian P. Yarbrough of Edward Jones rates the stock a buy but cites the risk of weakening membership renewals, traffic trends and international currencies. Wall Street firm Gordon Haskett downgraded the stock to hold from accumulate. Oppenheimer calls Costco a top pick and believes that the discount retailer can manage the increasing tariffs on goods from China.

The Daily Chart for Costco

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Courtesy of Refinitiv XENITH

The daily chart for Costco shows a positive reaction to earnings released on March 7 with a price gap higher on March 8. This made its annual pivot at $224.96 a price at which to buy. The price target for this move is its second-quarter pivot at $245.63, which has been a magnet since April 5. The gap below $245.63 on May 29 puts the stock below its 50-day simple moving average at $243.89. The 200-day simple moving average at $227.99 is a buy level. The semiannual value level lags at $213.09.

The Weekly Chart for Costco

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TheStreet Recommends

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Courtesy of Refinitiv XENITH

The weekly chart for Costco will be downgraded to negative if the stock ends below its five-week modified moving average at $243.14. The stock is well above its 200-week simple moving average or "reversion to the mean" at $177.12. The 12x3x3 weekly slow stochastic reading is projected to slip to 89.72 down from 92.45 on May 24. With the reading currently above 90.00, the stock is in an "inflating parabolic bubble" and this is a warning to reduce holdings.

Trading Strategy: Buy weakness to its annual and semiannual pivots at $224.96 and $213.09, respectively, and reduce holdings on strength to its quarterly risky level at $245.63.

How to use my value levels and risky levels:

Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February, March and April. The quarterly level was changed at the end of March. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years. The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best. The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.