Costco Stock Gets Pummeled Despite Upbeat Quarter

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Costco Stock Gets Pummeled Despite Upbeat Quarter

By Alan Farley | October 6, 2017 — 11:33 AM EDT

Costco Wholesale Corporation (COST) shares are getting pummeled in the aftermath of Thursday evening’s fiscal fourth quarter earnings report, dropping more than nine points to a four-week low despite beating EPS and revenue estimates. Weak gross margins have been cited for the decline, while fears of growing competition from Amazon.com, Inc.’s (AMZN) Whole Foods acquisition have also weighed on sentiment.

RBC, Stifel and Telsey analysts retained positive ratings after the news, insisting that investor fears are overblown and that the stock will prosper despite growing headwinds. Rapid e-commerce growth and solid traffic numbers have underpinned those optimistic outlooks, which may limit the downside in coming days. However, Morgan Stanley issued a downgrade ahead of the open, and others may follow, adding selling pressure that drops the price into critical support near $153. (See also: 7 Retail Stocks Hammered by Amazon May Be Good Buys.)

COST Long-Term Chart (1995 – 2017)

The stock tested the 1987 low near $5.50 at the end of 1994 and took off in a strong uptrend that cleared the top of a multi-year trading range near $15 in 1997. Rally momentum increased after the breakout, contributing to a powerful thrust that quadrupled the stock’s price into the 2000 high at $60.50. It plunged off that peak a few weeks later, dumping into the mid-$40s, with that price level holding support throughout the dotcom bear market.

Costco stock tested the bear market low in the first quarter of 2003 and turned higher, taking four years for the advancing price to reach the 2000 high. It broke out in the summer of 2007 and ticked higher into May 2008, when it topped out at $75.23, ahead of a steep decline during the economic collapse. That selling impulse settled at a four-year low at $38.17 in March 2009, giving way to a stair-step recovery that reached the prior high in the first quarter of 2011. (For more, see: Behind Costco’s 180% Rise in 10 Years.)

It broke out immediately, entering a powerful trend advance that posted the strongest gains so far this century. Buying pressure finally eased in February 2015 near $150, yielding a shallow rising channel that remains in force more than two years later. The relatively weak uptrend added more than 30 points into the May 2017 all-time high at $183.18, with price action since that time carving a triple top breakdown.

COST Short-Term Chart (2014 – 2017)

A base near $110 in the first half of 2014 gave way to strong rally into the February 2015 high at $156, printing the first peak in the rising channel. A decline into August undercut new support, leaving behind a candlestick shadow, ahead of less volatile price action that added three highs at resistance and two lows at support. The final high above $183 in May 2017 posted the middle peak of a triple top pattern that broke down in June when it undercut range support near $165. (See also: Costco’s Business Model Is Smarter Than You Think.)

Selling pressure ended in July at channel support near $150, generating a small-scale double bottom reversal, followed by a bounce into new resistance ahead of this week’s earnings report. The violently bearish reaction confirms the triple top breakdown, dropping the stock to $157 in the first hour of Friday’s session. In turn, this exposes a trip into channel support, which has now lifted to $153.

On-balance volume (OBV) topped out in March 2015 and entered an aggressive distribution wave that ended in August 2015, while an upturn into August 2016 fell short of the prior high. Bulls took control once again in the fourth quarter, lifting the indicator to an all-time high, while the June 2017 breakdown triggered violent downside that hit a three-year low. This bearish sequence raises the odds that the stock will eventually break support and enter a secular downtrend. (To learn more, see: Uncover Market Sentiment With On-Balance Volume.)

The Bottom Line

Costco stock fell nearly 10 points and 6% in the first hour of Friday’s session after a highly bearish reaction to fiscal fourth quarter earnings. Major technical damage in the second and third quarters could now generate a bearish feedback loop, breaking multi-year channel support and dropping the retailer’s shares into a bear market. (For additional reading, check out: Can Costco Recover From Amazon-Driven Decline?)

 

Published at Fri, 06 Oct 2017 15:33:00 +0000

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