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With the amount of selling that has hit the overall market so far in 2016, there are very few stocks that I am seeing that have been able to stay in an uptrend. There are plenty of stocks that are oversold and plenty that have broken upward trends, but few that still have an upward trend that is in place. Costco (NASDAQ: COST) is one company that meets that requirement.
If we look at the daily chart, there is very little to get excited about. Sure, the stock is oversold based on the slow stochastic readings and the 10-day RSI just hit an oversold level. But like I said before, there are plenty of stocks that meet that criteria.
The weekly chart is where we see the trend channel for Costco stock. We see that over the last 3 ½ years, the stock has been in a nicely formed channel. The stock is right on the bottom rail at this time.
As we saw with the daily chart, the weekly slow stochastic readings are in oversold territory. The 10-week RSI isn’t at an oversold level, but it did get down below the 40 level, which is about as low as the indicator has gotten since the bear market ended in March 2009.
The sentiment toward Costco stock is a little more bullish than I would like to see, with a short interest ratio of 2.64. Twenty out of 29 analysts have the stock rated as a “buy.” The other nine have it rated as a “hold.” While these sentiment readings are more positive toward the company than I would like, they aren’t over-the-top bullish.
Despite what the sentiment shows, I still like the idea of being long Costco. The weekly chart has a lot to do with that, but there is also the matter of the current economic outlook. With the economy appearing to slow in recent months, we could see a shift in consumer shopping patterns and this could benefit discount warehouse stores like Costco.
Rather than shopping at department stores and traditional grocery stores, consumers could shift to doing more shopping at stores like Costco as they look to stretch their income further. One way to do that is by buying in bulk at Costco. I personally shop at Costco, as I have three sons that are trying to eat me out of house and home. By shopping for certain staples at Costco, we can save quite a bit of money each month.
Given the technical picture and the fundamental idea, I would look to buy Costco stock below the $150 level with a target of at least $180. That target could adjust based on where the upper rail of the channel is at the time.
I would also set a stop-loss order to close the trade should the stock close below its 104-week moving average. It hasn’t closed below that trend line since late 2009. In 2008, when it moved below that trend line it was a bad sign for the stock.
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