How to Trade Costco Following Recent Earnings Miss

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How to Trade Costco Following Recent Earnings Miss

When it released its results on May 28, Costco Wholesale Corporation (COST) had an earnings shortfall. The stock is now above a golden cross, but on June 2, it failed to maintain its monthly pivot at $308.02. The large bulk merchant serves as a members-only wholesale warehouse where customers may purchase items like fuel and consumer goods. Due to social distance, the number of consumers permitted in shops has decreased, which has resulted in COVID-19-related costs and lost revenues.

When customers are squeezing their budgets, the stock has a bad track record. The reason for this was a decline in membership dues. The stock is expensive. Macrotrends estimates Costco’s P/E multiple to be 36.81 and its dividend yield to be at 0.91%.

The stock rose 4.9% year to date and finished Monday, June 1 at $308.29, 13.6% above its low of $271.28, set on February 26. Additionally, the stock is 5.2% behind its all-time intraday high, which was $325.26 on February 21.

The daily chart for Costco

Refinitv XENITH

Costco’s daily chart reveals that the stock started the previous 52 weeks above the golden cross. On April 3, 2019, the 50-day simple moving average crossed over the 200-day simple moving average, indicating that higher prices would follow. This served as confirmation of this. This followed the stock to the $325.26 intraday high it has ever reached on February 21.

Positively, the stock opened 2020 above its $270.48 semiannual value mark. The stock of Costco dropped sharply to $271.28 on February 28 after reaching a high of $325.26 on February 21. I believe that this trading range will hold up in the future.

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Note how erratic the stock’s trading has been since then. Between March 12 and April 3, the yearly pivot at $287.88 attracted a lot of attention. At $270.48, the low was slightly over its semiannual value level. On June 2, the monthly pivot point for June at $308.02 failed to hold.

The trading range is between its quarterly danger level of $324.07 and its semiannual value level of $270.48. The monthly pivot is $308.02 and the yearly pivot is $287.88.

The weekly chart for Costco

Refinitiv XENITH

Given that Costco’s weekly chart closed on Friday below its five-week modified moving average of $304.27, it will be demoted to negative. At $215.91, the stock is trading well above its 200-week simple moving average, or reversion to the mean.

According to projections, the 12 x 3 x 3 weekly slow stochastic reading will conclude this week at 60.17 as opposed to 59.20 on May 29. This week’s reading would drop below 59.20 if further weakening continued over the next several days.

Trading plan: Increase holdings on strength and decrease them on weakness. Buy Costco stock at its annual and semiannual value levels, which are $287.88 and $270.48, respectively. The magnet should continue to be the monthly pivot at $308.02.

How to apply my risky and value levels: My in-house analytics used the stock’s closing price on December 31, 2019, as an input. The yearly and semi-annual levels are still visible. The most recent nine closures in these time ranges are used in each computation.

The monthly level for June was created based on the May 29 closure, while the level for the second quarter of 2020 was established based on the March 31 close. While fresh quarterly levels are computed after the conclusion of each quarter, new weekly levels are calculated following the end of each week. Midway through the year, semiannual levels are updated, while annual levels remain active all year long.

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According to my hypothesis, nine years of volatility between closures is sufficient to presume that all potential bullish or negative developments for the stock have been taken into account. Investors should increase holdings on strength to a risky level and decrease them on weakness to a value level in order to capture share price volatility. A value level or danger level that was breached inside its time frame is known as a pivot. The likelihood of a pivot being tried again before the end of its time horizon is considerable.

The decision to employ 12 x 3 x 3 weekly slow stochastic readings was made after backtesting a number of techniques for analyzing share-price momentum with the goal of identifying the combination that produced the fewest false alerts. I’ve been pleased with the outcomes for more than 30 years since I did this after the 1987 stock market meltdown.

The stochastic reading includes the stock’s highs, lows, and closes over the previous 12 weeks. The discrepancies between the highest high and lowest low in relation to the closures are calculated in raw form. These levels may be read either quickly or slowly, and I found that the slower reading was most effective.

Readings over 80.00 are regarded as overbought, while readings below 20.00 are regarded as oversold. The stochastic reading ranges between 00.00 and 100.00. An “inflating parabolic bubble” development is indicated by a value over 90.00; this is usually followed by a decrease of 10% to 20% during the next three to five months. When the reading falls below 10.00, it is deemed “too cheap to ignore,” and during the subsequent three to five months, gains of 10% to 20% are often seen.

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Disclosure: The author has no holdings in any of the stocks mentioned and has no immediate plans to start any investments.

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