COST has been a strong momentum stock since last testing its 200-week simple moving average during the week of Sept. 17, 2010, when this "reversion to the mean" was $56.11. The momentum run-up reached its all-time intraday high of $169.73 on Dec. 8, just before reporting the company reported earnings for the quarter ended in November 2015.
But this is a volatile stock. COST gapped lower on Dec. 9 and fell by 16.6% before bottoming with the market on Feb. 8, with a low of $141.62. The stock rebounded by 12.8% to a high of $159.80 on March 31. The stock then declined again by 13.9% to its 2016 low of $137.57 set on May 18.
A positive reaction to earnings released on May 25 resulted in a price gap higher on May 26, and the stock began to march higher and nearly tested its all-time high on Aug. 11 with a high of $169.59.
Analysts expect Costco to earn $1.73 a share when the company reports earnings after the closing bell on Thursday. Analysts' feelings are mixed about what the retailer will report, which makes forward guidance will be the focus.
Even TheStreet's Jim Cramer is waiting on the earnings. He is cautious in the near term but likes the company for the longer term. "We look for further commentary on trends heading into the back of the year and for more details on the continued transfer over to the Visa (V) - Get Report rewards cards. We reiterate our multiyear $175 price target," said Cramer, manager of the Action Alerts PLUS portfolio, which owns Costco and Visa.
Tim Collins of Real Money, our sister site for active traders, writes that Costco's downside "has much more room available to it than the upside in my view." Click here to see Collins' technical analysis of the stock, as well as the bearish call spread that he recommends using ahead of COST's earnings release.
What should you do? Costco's technical charts can give you guidance. The daily chart below shows the Fibonacci retracements that can be traded. When you look at the weekly chart, the December high and the August high can be considered a double top for the stock.
The weekly chart shows a red line through the price bars. which is the key weekly moving average (a five-week modified moving average). The green line is the 200-week simple moving average considered the "reversion to the mean."
The study in red along the bottom of the chart is weekly momentum (a 12x3x3 weekly slow stochastic), which scales between 00.00 and 100.00, where readings above 80.00 indicates overbought and readings below 20.00 indicates oversold. A negative weekly chart shows the stock below its key weekly moving average with weekly momentum declining below 80.00 in a trend towards 20.00.
Here's the daily chart for Costco:
Courtesy of MetaStock Xenith
Costco shares trade around $149.50, down 7.5% year to date and in correction territory 12% below its Dec. 8 all-time intraday high of $169.73. The stock is 7.8% above its May 18 low of $138.57.
The daily chart shows the Fibonacci retracements of the decline from the Dec. 8 high to the May 18 low.
The stock quickly rebounded above its 23.6% retracement of $145.93 on May 26 on a positive reaction to earnings. By July 7 the stock moved above its 38.2% retracement of $150.47, its 50% retracement of $154.15 and its 61.8% retracement of $157.83. The stock nearly recaptured its entire decline as its Aug. 11 high was $169.59.
Since then the downside has been fast and furious, which could mean that weakness following earnings could be a buying opportunity at the 23.6% retracement of $145.93. To the upside a pop above the 38.2% retracement of $150.47 would target the 50% retracement of $154.15.
Here's the weekly chart for Costco.
Courtesy of MetaStock Xenith
The weekly chart for Costco is negative with the stock below its key weekly moving average of $156.05 and well above the 200-week simple moving average of $129.82, last tested during the week of Sept. 10, 2010 when this "reversion to the mean" was at $55.31. The weekly momentum reading is projected to decline to 26.48 this week down from 35.29 on Sept. 23, approaching the oversold threshold of 20.00.
Investors looking to buy Costco should consider doing so on weakness to $139.06, which is a key level on technical charts until the end of 2016.
Investors looking to reduce holdings should consider selling strength to $169.62, which is also a key level on technical charts until the end of 2016.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.