Costco Wholesale Corporation (COST) stock sold off to a two-month low on Friday after the company beat fiscal third quarter profit expectations by 22 cents and reported healthy 7.45% year-over-year revenue growth. Deteriorating retail sentiment in reaction to the escalating trade war kept buyers on the sidelines, but a quick bounce off intraday lows limited damage, keeping this market leader relatively close to the all-time high at $251.01 posted on May 22.

Barring last-minute agreements with China and Mexico, Costco's excellent management team will be forced to adapt business strategies to a growing list of import tariffs, raising the odds that they'll raise costs to customers or reduce bottom-line margins. It will be tough to keep the stock in bull market mode in either case, warning that current price action may eventually complete a long-term top.

COST Long-Term Chart (1997 – 2019)

COST
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The stock broke out above 1991 resistance in the mid-teens in 1997, entering a healthy trend advance that topped out above $60 in March 2000. It held up relatively well when the internet bubble burst, finding support in the mid-$20s in June, and it traded sideways into a 2003 test at the low. A slow-motion uptick starting at that level completed a round trip into the 2000 high in 2006, yielding a 2007 breakout that stalled in the mid-$70s in 2008.

The stock exhibited relative strength during the 2008 economic collapse, descending to a five-year low in March 2009, ahead of a strong recovery wave that reached new highs in 2011. Buying pressure continued at a torrid pace into August 2015 and eased into a shallower trajectory, continuing to post higher highs and higher lows into 2019. Even so, recent price action has failed a breakout above the 2018 high, warning that the long-term uptrend may be coming to an end.

Price action starting in 2015 carved a rising channel (red lines) that broke to the upside in the summer of 2018, displaying unusual buying power. It violated new support in the fourth quarter decline but jumped back above that level in January 2019, reestablishing a bullish line in the sand that has now risen to $220. The current downdraft needs to hold that support level to avoid a technical breakdown that exposes a trip down to the 50-month exponential moving average (EMA) above $180.

Fortunately for bulls, the monthly stochastic oscillator indicates that there's still plenty of time for price action to recover relatively minor losses and rally back to new highs. The stock entered a buy cycle near mid-panel in February 2019 and has now reached the overbought zone. However, there's no sign of a bearish crossover, suggesting that Costco stock will build a relatively narrow trading range in the coming weeks rather than sell off to new lows.

COST Short-Term Chart (2017 – 2019)

COST
TradingView.Com 

The on-balance volume (OBV) accumulation-distribution indicator leveled off in early 2018 after years of accumulation and turned higher in December, posting a series of 2019 highs that indicate loyal institutional sponsorship. The downturn in recent weeks registers on the daily chart, supporting other indicators that should keep this sector leader in bull market mode, despite worldwide trade tensions.

However, last week's decline triggered a failed breakout above the September 2018 high, setting off intermediate sell signals that could eventually drop the stock into a test at the upper red line near $220. The unfilled March gap and 50% retracement level of the 2019 advance are narrowly aligned at that level, setting up a magnetic target that could eventually catch complacent shareholders off guard.

The Bottom Line

Costco stock sold off on Friday after the retailer beat profit estimates and reported healthy growth, failing a breakout above the 2018 high. This reversal could generate additional downside into support near $220.

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