Costco Wholesale Corporation (COST) reported better-than-expected earnings per share (EPS) on Dec. 12, but the stock stayed below its 50-day simple moving average (SMA) now at $297.53.

Costco operates members-only wholesale warehouses for bulk buying of consumer goods. There are two levels of annual memberships: $60 for Gold Star and $120 for Executive. The gas stations associated with the warehouses also drive foot traffic inside the stores.

Investors appear to be worried that this business model may be difficult to sustain in the longer term. The stock set its all-time intraday high of $307.34 back on Sep. 9 and then faded to its 50-day SMA at $283.44. A positive reaction to earnings released on Oct. 3 resulted in a secondary high of $307.10 on Nov. 11 as a potential double top.

Costco stock closed last week at $291.73, in bull market territory at 53.9% above its Dec. 26 low of $189.51. The stock is 5.1% below its all-time intraday high of $307.34 set on Sep. 9. The stock is not cheap, as its P/E ratio is 35.03 with a puny dividend yield of 0.89%, according to Macrotrends.

The daily chart for Costco

Daily chart showing the share price performance of Costco Wholesale Corporation (COST)
Refinitiv XENITH

The daily chart for Costco shows the stock above a "golden cross" since April 3, when the 50-day SMA rose above the 200-day SMA to indicate that higher prices would follow. This signal tracked the stock to its all-time intraday high of $307.34 set on Sep. 9. When you see this pattern, the strategy is to buy weakness to the 200-day SMA, now at $274.95 and rising each day.

The close of $293.92 on Dec. 31 was an important input to my proprietary analytics. I show annual and semiannual value levels at $287.88 and $270.48, respectively, with its first quarter risky level at $306.85 just below the double top of $307.34 set on Sep. 9 and $307.10 set on Nov. 11. The monthly risky level for January is above the chart at $320.49.

The weekly chart for Costco 

Weekly chart showing the share price performance of Costco Wholesale Corporation (COST)
Refinitiv XENITH

The weekly chart for Costco is negative, with the stock below its five-week modified moving average at $294.76. The stock is well above its 200-week SMA, or "reversion to the mean," at $198.89. The stock has been above this average for more than five year. The 12 x 3 x 3 weekly slow stochastic reading ended last week declining to 46.39, down from 53.86 on Dec. 27. Before the stock traded to its high, this reading was above 90.00 at the end of July, which put the stock in an "inflating parabolic bubble" formation.

Trading strategy: Buy Costco stock on weakness to its annual and semiannual value levels at $287.88 and $270.48, respectively, and reduce holdings on strength to the quarterly and monthly risky levels at $306.85 and $320.49, respectively.

How to use my value levels and risky levels: The closing prices of stocks on Dec. 31, 2019, were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual, and annual levels. Each uses the last nine closes in these time horizons. New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.