Shares of wholesale membership warehouse operator Costco Wholesale Corporation (COST) came under pressure Wednesday after a better-than-expected fiscal first quarter earnings report wasn’t enough to keep Costco stock afloat. From a technical perspective, Wednesday’s price action can be qualified as a significant bearish reversal move, which often marks an intermediate-term top in a stock. Thus, active investors and traders could look to play the stock from the short side.
Costco earnings came to $1.12 per share, beating analyst estimates for $1.09. Total revenue came in at $26.87 billion, thus slightly below estimates of $26.92 billion. On a year-over-year basis, both revenue and same-store sales rose 7%. As of the end of the fiscal first quarter, Costco operated a total of 671 warehouses.
After the report, analysts were generally upbeat and iterated that the drop in oil prices should continue to positively impact Costco’s margins. Credit Suisse, for example, stuck with its “outperform” rating and raised its price target for Costco stock from $135 to $145.
Costco Stock Charts
On the multiyear weekly chart that stretches back to the 2009 lows, we see that the price movements since then have taken place in a well-defined uptrending channel.
However, we also note that the recent rally, particularly since the October lows, has taken an increasingly steep slope — one that bumped the stock into the upper end of the multiyear trading range. In fact, Costco stock rallied from the lower end of the range to the upper end of the range in less than two months, which is an acceleration in price that COST has not seen in a long time.
Also, from a Bollinger Band perspective, the stock is beginning to look very stretched as it keeps hugging the upper band.
On the daily chart, note that after an early-morning rally Wednesday, Costco stock quickly put gears in reverse and closed the day lower by 1.95%. This bearish price action is not only visually obvious, but through the lens of technical analysis it stands a good chance of having marked an intermediate-term top. The price action also fully engulfed the previous two weeks’ worth of price movement, which furthermore marks Wednesday’s drop as important.
Furthermore, note the big spike in volume to the extent that it hasn’t seen since March, and note that the recent rise in Costco stock was not supported by increasing upside momentum.
All in all, active traders and investors could now use Wednesday’s intraday highs to lean against on the short side for a multiweek move back down into the low $130s.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
