Costco Wholesale Corporation (COST) stock has booked impressive gains since breaking out above 2018 resistance in June, but technical evidence suggests that now is the time to take profits and hit the sidelines. Downside in coming months could be dramatic, potentially relinquishing 40 to 50 points and testing breakout support near $250. That level could also offer a low-risk buying opportunity for sidelined players, ahead of stronger upside in the new decade.

The retailer has shaken off headwinds generated by the trade war, building a customer base with folks fleeing higher-priced outfits while de-risking through supplier relationships outside of China. Ironically, a new Chinese Costco store is doing phenomenally well, but it will be difficult to sustain those numbers if the next round of trade talks fails in the fourth quarter. In addition, the company is not immune from the economic cycle, and a recession would have a dampening effect on profits.

COST Long-Term Chart (1992 – 2019)

Long-term chart showing the share price performance of Costco Wholesale Corporation (COST)
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A 1992 breakout into the mid-teens failed, yielding a decline that ended at a nine-year low in the single digits in 1995. The subsequent uptick mounted the prior high in 1997, setting off a powerful trend advance that continued into the 2000 top at $60.50. That marked the highest high in the next seven years, ahead of narrow range-bound action that held support in the mid-$20s. The stock finally turned higher in 2003, carving a slow-motion uptick that reached the prior high in 2007.

An immediate breakout stalled in the mid-$70s in May 2008, while the subsequent downtick completed a head and shoulders breakdown during the October crash. The stock continued to lose ground into March 2009, finally bottoming out at a five-year low in the mid-$30s, ahead of a bounce that ran out of gas in the low $60s in 2010. It finally completed the round trip into the 2008 high in 2011, generating a strong uptrend that eased quickly into a rising channel.

The channel rolled into a shallower trajectory in 2015, but the stock continued to post new highs, exhibiting market leadership that has continued into September 2019's all-time high at $304.64. However, the vertical impulse in place since December looks unsustainable, raising the odds for an intermediate correction that shakes out a large supply of shareholders while working off the extremely overbought technical condition.

Price action has pierced the top of the 20-month Bollinger Band® seven times since 2015, with each event triggering an intermediate correction. The seventh event is now in progress, with an inverted hammer candlestick that won't be confirmed until month's end. Three of the prior six instances have posted inverted hammers or gravestone dojis, adding a measure of symmetry that should not be ignored by shareholders.

COST Short-Term Chart (2018 – 2019)

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

A Fibonacci grid stretched across price action since September 2018 places the recent high just above the 2.00 extension, which marks a high-odds reversal zone during strong uptrends. Meanwhile, price action since December 2018 fulfills the minimum requirements for a completed Elliott five-wave rally set, with the third wave longer than the fifth wave but shorter than the first wave. If accurate, the first downside target lies around the 50% rally retracement level near $260.

The on-balance volume (OBV) accumulation-distribution indicator highlights impressive institutional sponsorship, breaking out above the 2015 peak (red line) in August 2018. The sell-off into December tested new support successfully, yielding a powerful accumulation wave that posted a long series of new highs. A breakdown through the blue trendline in place during the 2019 ascent should offer an early and reliable signal that the correction is getting underway.

The Bottom Line

Costco Wholesale stock may be at the cusp of an intermediate correction that drops the market leader 40 to 50 points.

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