Costco Gaps Lower, Gives This Technical Analyst a Rare Treat

In this daily bar chart of COST, below, we can see the sharp April-May decline in the price of the stock. COST subsequently trades higher from late May to late July in a tighter and tighter range. Trading volume declines even as the share price climbs. This is a typical wedge pattern — higher prices despite slack volume — gains on volume “vapors” is a weak condition and vulnerable. The daily On-Balance-Volume (OBV) line has followed prices higher while the Moving Average Convergence Divergence (MACD) oscillator is ready to cross to the downside for a take-profit, sell signal. 

 

In this weekly Japanese candlestick chart of COST, below, we see a mixed picture. Prices have rallied the past six weeks but the latest candle pattern is a spinning top, signaling a balance between bulls and bears. A bearish candle this week can mark a top reversal. The weekly OBV line shows a small rise the past six weeks as trading volume has been shrinking. The MACD oscillator is crossing to the upside for a cover shorts buy signal. 

 

In this daily Point and Figure chart of COST, below, we can see a potential upside price target in the $574 area. This could change. 

In this weekly Point and Figure chart of COST, we can see a price target in the $713 area. This could change. 

 

Bottom line strategy: A rising wedge pattern is bearish. Prices go higher and higher on shrinking volume. One day the music stops and prices turn lower. Because the pattern unfolds on weak volume the decline can be swift and typically prices retrace most or all or the previous advance. Avoid the long side of COST.