Retail stocks are returning from the grave, but the resurrection is a ruse. My doubt is built on a heap of technical deterioration. I suspect the bounce in Costco Wholesale Corporation (NASDAQ:COST), in particular, is destined for failure. But that’s okay. We can make COST stock’s pain our gain.
Before diving into COST’s chart, let’s first look at the entire retail space using the SPDR S&P Retail (ETF) (NYSEARCA:XRT). On the bearish side of the ledger, XRT remains well-entrenched in a downtrend complete with descending moving averages across the board. Rallies are always suspect in such an environment.
Resistance looms large overhead in the form of the 50-day moving average as well as a prior pivot at $41.25.
It’s worth noting bulls have made some progress this month. While XRT carved out a lower pivot low, it was on slowing momentum (see the RSI divergence). What’s more, this week’s bounce transpired on heavy volume showing some serious participation going on. Both developments lead me to believe the rally could persist for a few days yet.
COST Stock Still Looks Gross
Despite buyers making some inroads in the broader retail space, Costco shares still stink. Remember COST shares received a disproportionate share of the pain following Amazon.com, Inc.’s (NASDAQ:AMZN) purchase of Whole Foods Market, Inc. (NASDAQ:WFM). It fell more than virtually every other member of the space.
This week, COST was able to eke out a two-day bounce. And, believe it or not, it’s the first time it has been able to go up for two consecutive since the drubbing began in mid-June. We’re talking about some serious suckitude here.
The first two resistance levels that will come into play are the prior support at $157.50 and the 20-day moving average. If COST does somehow claw its way back to those levels, I suspect the rally ends there.
Make Costco’s Pain Your Gain
To capitalize on Costco’s inability to get off the mat, consider selling an Aug $160/$165 bear call spread for 62 cents or more. The implied volatility for COST options remains pumped, so we’re receiving a better credit than is normal.
If the stock sits below $160 at expiration, you will capture the 62-cent reward. The risk is limited to $4.38 and will be forfeited if Costco stock pops above $165 by expiration. To minimize the damage, I suggest exiting if the stock jumps above the $161.50 resistance level.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell Iron Condors for monthly income.