Just ahead of the election, Costco Wholesale (COST) - Get Report was in the last stage of a deep selloff from its August peak. By late October, a promising divergent low in the daily moving average convergence/divergence was developing just as selling pressure was easing. By Nov. 4, the stock had dropped more than 15%, taking out multiple layers of support along the way.
After the post election ramp-up, it was clear Costco had left behind a major spike low.
A new leg of the Costco post-election rally began with a powerful earnings-inspired breakout gap on Dec. 8. The stock moved higher over the next two weeks, stretching the rally off the November low to more than 16%.
Once shares reached the $165 level, exhaustion set in, and a healthy consolidation began. Since Costco hit this level on Dec. 20, the stock has traded in a narrow range while underlying support has strengthened.
As January winds down, Costco is setting up well for a breakout. In the near term, investors should keep a close eye on the $165 area. A convincing break through this level could spark a run back up to the 2015 and 2016 highs.
As this pattern develops, the stock will remain in a good position as long as it maintains last week's low. A close below $161 would send a clear warning sign that more consolidation will be needed before the stock can mount a challenge of major resistance near $170.
Jim Cramer of the Action Alerts PLUS charitable trust portfolio is also bullish on Costco. He recently wrote an article for subscribers about why Costco is "Amazon-resistant." Cramer has a $175 price target on the stock, and he wrote on Friday that on a pullback to $160 he would upgrade the stock and would consider buying more.
This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.