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Trade of the Day: Costco Wholesale Corporation Leads the Breakout

Serge Berger

Retailer stocks rallied on Wednesday on the back of better-than-expected news out of Macy’s Inc (NYSE:M). Shares of wholesale retailer Costco Wholesale Corporation (NASDAQ:COST), too, saw a nice lift on Wednesday — one that now has it flirting with a breakout on its charts. Active investors and traders could look to trade COST stock higher if it can overcome this well-defined line on the charts.

Retailer stocks are a great example of a group of stocks where news out of one name can quickly affect the entire group of stocks … such as what happened yesterday. As such, it is crucial to be aware when major retailers report their earnings reports as well as when the retail sales numbers for the group hits the news wires.

Speaking of earnings, Costco is scheduled to report its next batch of earnings on May 31, which is to say that any swing trade in the stock in my eye should be exited before that earnings report and only revisited after earnings have cleared.

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To be clear, this is very different from any longer-term positions one might have in the name, which may not be altered too much because of one earnings report.

COST Stock Charts


Click to Enlarge

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

On the multiyear weekly chart, we see that as a result of a rally in the fourth quarter of 2017 COST stock, and big-picture sideways consolidation since, the stock remains trading at the upper end of the multiyear up-trend as marked by the black diagonal line.

From this perspective, any major new breakout rally above $200 may not last long, as this would steepen the slope of the line in a late-cyclical environment.


Click to Enlarge

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

While I have my reservations about chasing COST stock higher at these levels from a longer-term perspective, the daily chart is primed with opportunity for trades. Here we see that after the stock gapped higher on April 16, it slipped into a sideways consolidation phase, which took place right below the January highs.

The rally on Wednesday pushed the stock right back to the upper end of this most recent and tight trading range, which also so far is capped at the round $200 mark. The setup here is straightforward; a push above the $200 level could open upside toward a next target at $210 while any strong bearish reversal on a daily closing basis would be a stop loss signal.

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