Costco (COST) at Technical Crossroads Ahead of Earnings

Costco Wholesale Corporation (COST) heads up a light earnings slate this week, reporting fiscal first quarter 2021 results after Thursday's closing bell. Analysts are looking for the retail giant to post a profit of $1.93 per share on $42.25 billion in revenue. If met, earnings per share (EPS) will mark a 12% profit increase compared to the same quarter in 2019. The stock gained less than 1% after the company beat fourth quarter estimates in September and posted an all-time high at $393.15 at the end of November.

The company is the 41st highest-capitalized S&P 500 component after more than a decade of impressive annual growth. The pandemic has been a windfall for the retailer, sharply increasing first quarter market share when smaller rivals were forced to close or curtail operations. That system shock continues to underpin healthy profits and revenue, supporting Costco stock's impressive 27% year-to-date return, following a 44% return in 2019.

Market players have been selling COVID-19 beneficiaries since Pfizer Inc. (PFE) reported positive vaccine results in November, but Costco stock should rally to new highs when this profit-taking exercise runs its course. Although many retailers have lost ground in the past month, Costco rival Target Corporation (TGT) booked strong gains after reporting a blowout quarter on Nov. 18, indicating there's a profit threshold that investors can't resist.

Wall Street consensus on Costco stock has held lofty levels for many months, with a "Strong Buy" rating based upon 15 "Buy," 4 "Hold," and 0 "Sell" recommendations. Price targets currently range from a low of $325 to a Street-high $435, while the stock is set to open Monday's session about $20 below the median $393 target. This humble placement raises the odds for a buy-the-news reaction if Costco beats estimates and raises guidance.

Costco Daily Chart (2018 – 2020)

The stock completed a breakout above the 2000 high at $60.50 in 2011, entering a rising channel pattern that held price within its boundaries into a 2018 channel breakout. It topped out at $236 in September of that year and pulled back, testing new support successfully, ahead of renewed buying interest that posted new highs in 2019 and February 2020. Volatility then exploded in March, when debate about COVID beneficiaries attracted the momentum crowd. 

Volatility declined in April when price action eased into a symmetrical triangle, ahead of a July breakout that attracted strong buying interest. The stock posted new highs each month into the Nov. 30 all-time high at $393.15, giving way to a pullback that has now landed on 50-day exponential moving average (EMA) support. The on-balance volume (OBV) accumulation-distribution indicator finally mounted the February high in November, ending a bearish divergence between price and volume.

The December pullback has also reached a trendline going back to June, raising the stakes ahead of this week's confessional. Specifically, both weekly and monthly stochastic oscillators will flip into sell cycles with little downside pressure, indicating that fallout from a sell-the-news reaction could evolve into an intermediate correction. Even so, there's little sign of selling pressure heading into the report, and everything we know now predicts another strong quarter.

The Bottom Line

Costco reports earnings after the close on Dec. 10, with a sell-the-news reaction favoring much lower prices.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.