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Costco's Been Hammered. Is It Finally a Buy?

Costco Wholesale stock has been hammered over the past few weeks. Is it one to buy ahead of its earnings report? The charts give a hint.

Costco  (COST)  stock has been through the wringer lately. While flat on Thursday, the shares are down in nine of the previous 10 sessions.

Worse, the stock rose just a quarter percentage point on its lone day in the green in that stretch. 

With the Issaquah, Wash., membership-based retailer's earnings due up after the close, investors want to know if it’s time to buy Costco.

Regardless of the results, the inclination to get long at least a partial position is tempting.

From a pure trading perspective, Costco may not be the ideal candidate for longs. It’s clearly out of favor at the moment.

But this is a well-run retailer and it's part of the cohort within the sector that continues to do well, at least fundamentally.

Target  (TGT) , Walmart  (WMT)  and other strong performers — the so-called pandemic stocks to buy — have all been out of favor. That’s likely as the reopening plays are in favor at the moment.

Let’s look at the charts.

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Trading Costco Stock

Daily chart of Costco stock.

Daily chart of Costco stock.

In the type of tape we’ve had over the past year, investors have gotten used to stocks rallying, not declining, into earnings reports. In the case of the former, it’s possible to see a sell-the-news reaction.

With Costco nosediving into the print, might we see the opposite?

It had been months since Costco stock tested the 200-day moving average, yet the shares knifed right through this mark as if it hadn't been there.

The stock is starting to look a bit exhausted on the downside, as it approaches the prior breakout area near $320 and the 21-month moving average. The latter has been solid support over the years. 

We're also seeing some divergence on the Williams %R reading at the bottom of the chart, which isn't making a new low while the stock is. 

These observations combine to support the idea that Costco may be presenting a decent risk/reward setup ahead of the earnings.

I’m not a big fan of taking trades ahead of big events, due to the rather obvious risks that they present. Many investors are not intrigued by this idea, either. 

But with the stock down almost 20% from the highs, Costco is looking attractive from an investment perspective, at least for an initial position size.

On a deeper dip, perhaps the stock could push down toward $300. On a rebound, look to see how Costco handles its 200-day moving average, then its declining 50-day moving average. Above both puts $360 on the table.