Costco Wholesale Corporation (COST) stock set its all-time intraday high of $325.26 on Feb. 21 and then rapidly plunged to $271.28 on Feb. 28, a quick decline of 16.5%. This is the trading range that should hold for a while for this big box bulk retailer.
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.
During the COVID-19 consumer lockdown, Costco's stores are open with shorter hours of operation. The company is monitoring lines of shoppers, attempting to follow the safe-distance guidelines, with special early hours for senior citizens. There are more consumers ordering online with deliveries made to their homes.
The stock is not cheap. Its P/E multiple is 36.38 with a dividend yield of just 0.85%, according to Macrotrends. The company has beaten earnings per share (EPS) estimated for the past five quarters. Costco shares closed last week at $300.01, up 2.1% year to date and in bull market territory at 28.7% above the low of $233.05 posted on May 31, 2019. The stock is also 7.8% below its all-time intraday high of $325.26 set on Feb. 21, 2020.
The daily chart for Costco
The daily chart for Costco shows that the stock began the past 52 weeks above a "golden cross" formation. This was confirmed on April 3, 2019, when the 50-day simple moving average rose above the 200-day simple moving average to signal that higher prices would follow. This tracked the stock to its all-time intraday high of $325.26 set on Feb. 21.
Costco stock began 2020 above its semiannual value level at $270.48, which was a positive. After the stock topped out at $325.26 on Feb. 21, it quickly fell to $271.28 on Feb. 28. This is a trading range that I expect will hold.
Note how choppy the stock has traded since then. The annual pivot at $287.88 was a magnet between March 12 and April 3. The low was just above its semiannual value level at $279.48. The monthly risky level at $308.95 was tested on April 7.
The trading range is between the semiannual value level at $270.48 and the quarterly risky level at $324.07. In between are the annual pivot at $287.88 and the monthly risky level at $308.95.
The weekly chart for Costco
The weekly chart for Costco is neutral, with the stock above its five-week modified moving average at $297.14. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $209.91. The 12 x 3 x 3 weekly slow stochastic reading is projected to slip to 42.99 this week, down from 46.22 on April 3.
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 its monthly and quarterly risky levels at $308.95 and $324.07, respectively.
How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.
Second quarter 2020 and monthly levels for April were established based upon the closing price on March 31. New weekly levels are calculated after the end of each week, and new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, while 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 shares 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 is typically 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.