NEW YORK (TheStreet) -- Costco (COST) stock has been in a solid uptrend since September 2010. The members-only big-box retailer offers almost every product members would want or need. But Costco's longer-term uptrend was interrupted on Nov. 25, 2013, after it traded as high as $126.12. From this high the stock declined 13% to its 2014 intraday low at $109.50, set on Feb.4. The stock traded back and forth around its 200-day simple moving average between Jan. 8 and July 8 and then the momentum run-up returned.
So how should investors trade Costco stock after this momentum run and before its earnings announcement before the opening bell Wednesday?
Last Friday Jefferies re-iterated its hold rating for Costco but upped its price target to $130 from $118. Such a call makes little sense when the stock is trading around $143.
When a stock is trading well above a price target shouldn't the stock have a sell rating? Maybe not. Here's how to trade Costco now, including exit strategies due to the stock's momentum status.
It's been quite a run. The rally from the 200-day simple moving average at $116.26 on July 8 to the stock's all-time intraday high set at $143.49 on last Thursday, Dec. 4, was a solid 23% climb. The jump Thursday was prompted by Costco's November same-store sale report, which showed a year-over-year gain of 9% -- the best number over at least the last two years. Analysts expect Costco to report earnings of $1.08 per share.
Here's the daily chart for Costco.
Courtesy of MetaStock Xenith
The daily chart for Costco ($142.33) shows how the momentum run stalled from a Nov. 26, 2013, high to the breakout above the 200-day simple moving average (green line) at $116.26 on July 8. The in-between low is $109.50, set on Feb.4.
The momentum runup of 23% is shown from the 200-day SMA at $116.26 on July 8 to the all-time intraday high set at $143.49 on Dec. 4.
Here's the weekly chart for Costco.
Courtesy of MetaStock Xenith
The weekly chart for Costco shows that the 200-week simple moving average (green line) was the staging area from which the longer-term momentum run began. The run started when this average was $56.54 in September 2010. The 200-week SMA is now up to $113.59.
The weekly chart is positive but overbought, with its key weekly moving average at $137.66. The momentum reading shown in red at the bottom of the graph is rising above the overbought threshold at $80.00 with a reading of $95.00.
Investors in Costco should book profits by entering a "good 'til canceled" limit order to sell strength to $153, or 7.5% above Monday's close. Trading below a key technical level at $142.15 going into the earnings report would be a warning. Investors should employ a sell-stop below Costco's key weekly moving average at $137.65, which will be rising each week.
If you are looking to buy Costco on weakness enter a "good 'til canceled" limit order to buy weakness to key technical levels at $123.50 and $108.75.
This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.
TheStreet Ratings team rates COSTCO WHOLESALE CORP as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:
"We rate COSTCO WHOLESALE CORP (COST) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, increase in net income, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. We feel these strengths outweigh the fact that the company shows low profit margins."
You can view the full analysis from the report here: COST Ratings Report