Costco Wholesale Corporation (COST) missed fiscal second quarter earnings estimates while reporting in line revenues on Wednesday evening, triggering a sell-the-news reaction that is probing three-week lows. Market players failed to respond to a healthy 10.8% year-over-year quarterly sales increase, worried by growing competition in the supermarket space from Amazon.com, Inc. (AMZN), Walmart Inc. (WMT) and The Kroger Co. (KR).

Sales growth compared with the prior quarter decelerated to 8.4%, adding to shareholder anxiety that could now generate a test at the February low near $175. Selling pressure has grown considerably since December, with funds quietly taking profits near bull market highs, expecting 2018 growth to falter in the highly competitive environment. Even so, growing e-commerce strength could forestall a steeper correction, with the company posting an impressive 38% year-over-year increase. (See also: Costco's Profit, Same-Store Sales Miss Estimates.)

COST Long-Term Chart (1992 – 2018)

 

A multi-year uptrend ended at $15.32 in 1991, giving way to a persistent downtrend that finally bottomed out at $6.00 in 1995. The subsequent recovery wave caught fire in 1997, generating a rapid advance that topped out at $60.50 in April 2000, just three months after the company posted the second split in its long public history. It fell quickly into the mid-$40s, with that level offering support throughout the internet bubble bear market.

The stock turned higher once again in 2003, carving a rising channel that reached the prior high in 2006. A year-long base at that level completed the final stage of a cup and handle breakout that stalled a few months later in the mid-$70s. Costco shares then joined world markets in the economic collapse, dumping more than 35 points into a five-year low in March 2009, ahead of a bounce that completed a round trip into the prior high two years later.

A 2012 breakout signaled the start of a fruitful period that nearly doubled the stock price into the first quarter of 2015. The uptrend then eased into a shallow rising channel, posting a long series of new highs into December 2017, when it stalled at channel resistance for the fourth time. The February decline confirmed a reversal at that level, targeting channel support that has now lifted above $160. (For more, see: Business Model Analysis: Costco vs. Sam's Club.)

COST Short-Term Chart (2017 – 2018)

 

The channel has crisscrossed the 200-day exponential moving average (EMA) repeatedly since June 2015, establishing a short-term downside target at $175, which also marks the February low. The stock tried to push above that level three times in 2017, establishing horizontal resistance that was mounted in November 2017. The February decline bounced at that support level, while a violation would now signal a failed breakout

On-balance volume (OBV) reached the 2008 high in 2015 and turned sharply lower into 2016. It has carved a surprisingly ragged pattern since that time, lifting to a new high in the first half of 2017 and crashing once again, while buying pressure into 2018 failed to match the price's ascent to an all-time high. This marks a bearish divergence, while the vertical 2015 and 2017 declines warn that the stock could get sold aggressively once again.

Wednesday's low at $184.78 could set the pace into Friday's close because it also marks three-week range support and the 50-day EMA. A breakdown may attract aggressive short sellers, triggering a rapid decline into the February low, which needs to hold to deter continued downside into channel support. Conversely, a rally above $196 would mark a significant victory for bulls, setting the stage for a healthy run above $200. (See also: How Costco's Stock Can Soar on E-Commerce.)

The Bottom Line

Costco is losing ground after missing profit estimates despite healthy comparative sales results. The stock has been caught in a narrow trading range since reversing at long-term channel resistance, suggesting that bears will ultimately prevail, dropping the retailer into the $160s. (For additional reading, check out: 8 Companies Amazon Is Killing.)

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

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