Costco Wholesale Corp. (COST) - Get Report investors have found out the hard way that the biggest price discount at the $67 billion club store chain this summer might just be on Costco's shares themselves.
Costco has shed more than 16% of its market value since peaking back at the start of the summer, underperforming the rest of the S&P 500 in dramatic fashion as the rest of the broad market hovers around all-time highs. But after plunging double digits in the past 118 days, Costco's price action is actually starting to look buyable again.
To figure out how to trade shares as the dust settles around Costco's correction, we're turning to this stock's chart for a technical look.
Costco's selloff was sparked in large part by Amazon's (AMZN) - Get Report high-profile purchase of Whole Foods, which closed last week. Goldman Sachs (GS) - Get Report cut Costco from its "conviction buy" list on the weight of that retail M&A deal alone. But while the Amazon-Whole Foods merger spooked retail investors initially, analysts are starting to come to terms with the fact that it might not have as much as a revenue impact on major brick-and-mortar retail stocks -- like Costco -- as first thought.
There are two key technical factors working in Costco's favor right now. First, since bottoming back in mid-July, Costco has been establishing higher lows that connect to this stock's November price bottom. In other words, the long-term uptrend is actually still intact in shares right now. And second, when paired with resistance at the $160 level, that uptrending support line forms a bullish price pattern called an ascending triangle.
Simply put, a material push through $160 sends a fresh buy signal in shares of Costco.
What makes that $160 level so important for this stock? It all boils down to buyers and sellers. Price patterns, like this ascending triangle setup, are a good quick way to identify what's going on in the price action, but they're not the ultimate reason shares look attractive here. Instead, the "why" is driven by basic supply and demand for Costco's shares themselves.
The $160 resistance level is a price where there has been an excess of supply of shares since June; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $160 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Momentum, measured by 14-day RSI up at the top of Costco's chart, adds some extra confidence to an upside move from here. Our momentum gauge has been making higher lows since June, indicating that buying pressure is coming in at these lower price levels.
Once Costco crosses $160, it's time for buyers to pull the trigger on this trade.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.