Costco Wholesale Corporation (COST) is trading lower by nearly 2% in Friday's pre-market despite beating third quarter 2020 top- and bottom-line estimates. A profit of $1.89 per share beat expectations by $0.03, while revenues rose 6.7% year over year to $37.3 billion, marking impressive growth. U.S. stores stayed open during the outbreak but were hampered by social distancing and supply disruptions, making the quarterly metrics even more impressive. E-commerce sales rose 66.1% during the same period, recapturing a chunk of income lost through physical sales.

The sell-the-news reaction follows similar action after Walmart Inc.'s (WMT) report on May 19, highlighting distribution throughout the big box group in the past six weeks. It's likely that smart money is exiting these issues at a rapid pace, expecting sales to contract at the same time that recessionary forces reduce consumer buying power. It makes sense because the retail sector is highly cyclical, often rising during periods of economic expansion and falling during downturns.

However, the company will report May sales on Wednesday of next week, and continued strength could unravel the short-term bearish response. The nationwide reopening may have unleashed additional demand for goods and services that were deferred during stay-at-home orders, giving sales another boost that captures the market's attention. Even so, it's best to remain skeptical through the release due to the weak accumulation readings.

COST Long-Term Chart (1997 – 2020)

Long-term chart showing the share price performance of Costco Wholesale Corporation (COST) 

Costco stock broke out above 11-year resistance in the mid-teens in 1997, entering a strong uptrend that topped out at $60.50 in April 2000. It cut in half in the next month, finding support at $25.95 before bouncing into 2001. Price action held within those boundaries for the next seven years, carving a successful 2003 test at the low, followed by a slow-motion uptick that reached range resistance in 2007. The subsequent breakout made limited progress, topping out in the mid-$70s in the second quarter of 2008.

Price got cut in half once again during the economic collapse, posting a higher low at $38.17 in March 2009 and turning higher in a two-legged recovery that completed a round trip into the 2008 high in 2011. A breakout eased quickly into a rising channel and held those boundaries into a 2014 breakdown. It entered a second channel at the start of 2015 and posted solid gains into June 2018, when it blew through the top of the channel in a dynamic advance that stalled at $245 in September.

The subsequent decline tested new support for three months before committed buying interest generated a fresh breakout. Volatility increased in the fourth quarter, with price carving a chaotic pattern that generated even higher volatility during the pandemic-driven sell-off. The stock has traded between the Feb. 21 all-time high at $325.26 and Feb. 28 six-month low at $271.28 for the past two months, completing a symmetrical triangle that would predict a bullish outcome, expect for persistent selling pressure under the surface.

COST Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of Costco Wholesale Corporation (COST)

The on-balance volume (OBV) accumulation-distribution indicator posted an all-time high with price in February and entered a distribution phase that hit a 12-month low in mid-May. The stock is trading more than 60 points higher now than at the time of the prior OBV print (black line), signaling a conflict that strongly favors lower prices in coming weeks. However, the pattern may be the final arbiter in this equation, with a triangle breakout setting off new buying signals.

Given these inputs, most investors should stay on the sidelines for now, watching this divergence unfold. New shareholders can place stop losses under triangle support that has risen to $300 and step to the sidelines on a breakdown, which will also require breaking the 50- and 200-day exponential moving averages (EMAs). That bearish event could set off major sell signals, presaging downside that could extend into the upper red line and .786 Fibonacci rally retracement level near $220.

The Bottom Line

Costco is selling off despite beating third quarter 2020 earnings estimates, adding to persistent selling pressure since early April.

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