Costco Stock: Time Running Out for Bulls

Costco Wholesale Corporation (COST) stock has been hovering at January resistance for the past two months and could break out soon, resuming its bull market trajectory. Rising GDP has bolstered consumer spending in the second quarter, powering improved sentiment that could lift shares of the big box retailer above $225. However, the stock needs to find committed buyers in the next two weeks or risk adverse relative strength cycles that could trigger a major downturn.

The stock sold off after reporting fiscal third quarter earnings last week, despite beating estimates and posting double-digit same-store sales growth. Dip buyers stepped in after the decline hit a two-week low, generating a bounce that has failed to mount the closing price before the report. This inconclusive action signals a continued lack of buying power that sets a time limit for an otherwise bullish cup and handle breakout pattern. (For more, see: 3 Consumer Stocks on Verge of Steep Declines.)

COST Monthly Chart (1995 – 2018)

A multi-year downtrend ended within 50 cents of the 1988 low in March 1995, while the subsequent uptrend gathered momentum into April 2000, topping out at $60.50. The stock got cut in half in the next six weeks, dumping vertically into the mid-$20s before bouncing back above $30. That plunge marked the lowest low of the bear market, ahead of narrow sideways action that tested range support for more than three years. 

It turned higher in the second half of 2003, entering a channeled uptrend that broke out to a new high in 2007. Buying power fizzled out in the mid-$70s in 2008, carving a double top breakdown that posted steep losses during the economic collapse. Selling pressure ended at a five-year low in the upper $30s in March 2009, giving way to a recovery wave that completed a round trip into the prior high in 2011. It broke out a few months later, entering a powerful advance that doubled the stock's price into February 2015.

The uptrend then eased into a shallow orientation while volatility spiked to the highest levels of the decade. The August 2015 low at $117 marked the first leg in a broad channel that posted higher highs into January 2018's peak at $200. The stock sold off into February and returned to that level in April but still hasn't broken out, with buying spikes running into aggressive selling pressure. Meanwhile, the monthly stochastics oscillator crossed into a potential sell cycle in April but hasn't accelerated lower, which is needed to confirm the reversal.

COST Short-Term Chart (2017 –  2018)

The 2018 breakout pattern looks less impressive when comparing current price action with the highs posted between 2015 and 2017. Those rallies ended between $170 and $183, meaning that the stock has been adding points at a relatively slow pace despite the roaring bull market. It also predicts that momentum will develop slowly following a breakout, with the three-year rising highs trendline now situated just above $206.

On-balance volume (OBV) topped out in June 2017 and plunged to a five-year low in July. The subsequent accumulation wave came up short, stalling well under the prior high in December. Buyers and sellers in 2018 have failed to budge the indicator, reinforcing the three-month standoff at resistance. It has now drifted to a two-month low, when price was trading in the mid-$180s.

The small bull flag in place for the past two weeks could set off short-term breakout signals when the stock crosses the $200 threshold. Positive energy following that small advance could generate a wide range rally bar that reaches channel resistance. The relatively small trip into that level will offer a better opportunity for short-term traders than long-term trend followers, who need a channel break or deep pullback to justify exposure. (See also: Costco to Gain on Tax Benefits: Wells Fargo.)

The Bottom Line

Costco stock has been hovering at January resistance since April but needs a strongly bullish catalyst to end the standoff and trigger a breakout above $200. (For additional reading, check out: Costco's Business Model Is Smarter Than You Think.)

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