Shares of Costco Wholesale Corporation (NASDAQ:COST), as a result of the latest two-day selling spree, is now once again roughly flat for the year. COST stock has been on a fairly wild ride for most of 2017, and that looks set to continue.
When Costco reported its latest batch of earnings last Oct. 5, despite an earnings beat, it could not win back the hearts of investors as the concern around continued margin squeeze took center stage.
The online retailing world is continuing to weigh on brick-and-mortar retailers such as Costo, and while to most savvy investors that is nothing new, longer-term chart of COST stock increasingly looks to be in jeopardy.
Let’s also note that the entire retailing complex, at least as measured by the popular SPDR S&P Retail (ETF) (NYSEARCA:XRT), is struggling year to date and is down by more than 7% thus far for 2017. Through the lens of technical analysis, so you know, the XRT ETF last week once again rejected its 200-day moving average, which continues to act as resistance.
COST Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
Moving on to the charts of COST stock and starting off with the multiyear weekly picture, note that the up-trend has been well-defined.
Earlier this year in May and June, the stock once again reached the upper end of this channel, where it promptly and much in line with history once again got rejected and began moving lower. Since early July the stock has spent most of its time in the lower third of this longer-standing range and with the latest two-day selling smack it is increasingly looking vulnerable to break below this channel.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see that following the June sell-off that brought this stock back to the lower end of its longer-term trading channel, it attempted a rally into last week. This rally, however, promptly stalled after last Thursday’s earnings report. Through the lens of technical analysis this reversal over the past two days also occurred at a confluence resistance area made up of both the red 200-day moving average as well as a 50% retracement of the sell-off from the June highs down to the July lows.
Such reversals as we are seeing in COST stock can be taken advantage of with a high-probability income-generating strategy using options.
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From here, while COST stock doesn’t have to continue falling at the rate it has over the past two days, the path of least resistance through a multiweek/month lens is lower and toward $150 and possibly the $140 area as next downside targets.
Options traders could look to sell out-of-the-money call spreads while directional trades consider shorting the stock in small size but respecting any possible strong bullish reversal as a stop loss signal.
Check out Anthony Mirhaydari’s Daily Market Outlook for Oct. 10.
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