Consumers appreciate being able to load up on goods at affordable prices at Costco (NASDAQ:COST). But for investors eyeing a purchase of COST stock, our advice is to wait for a drop on the price chart before you shop. Let me explain.
For many American families, shopping at Costco is a rite of passage during the holiday season. Almost as certain as buying a tree or drinking eggnog, there’s a good chance a gift has been bought or received which was purchased at the warehouse retailing giant. But don’t make the mistake of buying COST shares today.
If you’re a fan of investing in what you use, COST stock should deserve a spot in your portfolio. It’s a well-worn philosophy made famous by legendary Fidelity fund manager Peter Lynch. Still, being a smart shopper is also key to this strategy. And right now shares of Costco aren’t cheap.
To be clear, nobody doubts Costco’s financial soundness. What’s more, after entering the Chinese market this year, there’s plenty of growth potential to look forward to. But COST stock is historically expensive. Bottom-line, Peter Lynch would agree shares are not well-supported for today’s Costco investors.
COST Stock Price Weekly Chart
Source: Charts by TradingView
Even the best stocks correct. From Apple (NASDAQ:AAPL) to Home Depot (NYSE:HD), corrections are a part of investing. Every stock goes through it. Now and following last week’s mixed earnings announcement, COST’s tenuous financial position is on shakier ground.
Technically, Friday’s post-earnings reaction has put COST stock into a test of its uptrend line established last December during a widespread market correction. In isolation, it’s a low-risk, higher-reward spot to buy Costco shares. But I’d advise avoiding this temptation.
Given COST’s steep fundamentals, a recent failed cup-with-handle and oversold, but weak-looking stochastics, there’s an increased likelihood Costco shares are facing a larger correction. The good news is corrective activity in stocks with solid long-term prospects like COST stock eventually make for better buying opportunities.
COST Stock Strategy
For investors comfortable shorting stocks, follow-through beneath Friday’s low offers a nice spot for entering a bearish position. Remember, even in healthy investing environments, corrections of up to 30% are common. I’d look at the 38% Fibonacci level for taking initial profits. That works out to a more conservative corrective move of around 15%.
If COST stock declined by 20%, a congestion pattern built around the former all-time-high and 50% offers additional reasons to reduce bearish, short delta risk. And in my estimation, that kind of price drop is where the evidence grows more interesting for investors keen on shopping for value on the Costco price chart.
Investment accounts under Christopher Tyler’s management do not currently own positions in securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits