We are adjusting our Costco strategy as bearish signals emerge
We reviewed Costco Wholesale (COST) charts ahead of earnings on March 2, where we wrote that “COST charts look positive and traders could go long on COST before earnings hit $490.” COST has rebounded over the past month, but now a change in our technical strategy is needed as bearish divergences have emerged.
In COST’s updated daily bar chart below, we can see that stocks have improved over the past month, but price is just one thing we’re watching. COST hit a slight new 52-week high, but trading volume did not increase.
The On-Balance-Volume (OBV) line has not reached a new high to confirm the new high price and this is a bearish divergence – the new high price is not offset by the movement of the indicator. The 12-day price dynamics study shows roughly even highs from February to March, even though prices made new highs – this is also a bearish divergence.
In the COST weekly Japanese candlestick chart below, we can see an upper shadow on the last weekly candle. This tells us that traders have rejected the highs above $575.
The weekly OBV line appears to stabilize in early March. The 12-week price dynamics study shows a much lower price bar from December, giving us a bearish divergence.
In this daily Point and Figure chart of COST, below, we can see a potential price target on the upside of $649. A pullback to $561.29 could mean a failed rally.
In this weekly Point and Figure chart from COST, below, we can see a potential price target of $789, but a reversal is also possible here.
Background strategy: Traders who are long COST against our previous buy recommendation should see profits now. Prices fell short of targets but a number of bearish divergences prompt us to change our strategy. Sell and then sit on the sidelines.
Receive an email alert each time I write an article for Real Money. Click “+Follow” next to my signature for this article.