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Buy This Costco (COST) Dip Before It Shoots Up

Published July 13, 2017
7:58 PM

Costco (COST) has been in an overexuberant decline since news of the Amazon and Whole Foods merger. Fortunately, this decline in the stock has brought it in-line with recent support levels and should begin to move upward once again. The stock has been in a consistent bullish trend since 2010. The recent decline seems to be part of the natural cycle for Costco. This cycle points upward next and also has other factors correlating to this move. On multiple occasions through the long bull trend, three of the technical indicators discussed below have been at similar levels in which they are now. These instances have resulted in gains for the stock. I have also conducted further analysis based on other historical information and readings that confirm a pending gain for Costco which are laid out below.



Costco Wholesale Corporation Chart From TradingView.com

When we look at technical indicators, the relative strength index (RSI) is at 30.7171. RSI tends to determine trends, momentum, overbought and oversold levels as well as likelihood of price swings. I personally use anything above 75 as overbought and anything under 25 as oversold. Currently the RSI is moving upward from recent oversold levels.

The positive vortex indicator (VI) is at 0.7644 and the negative is at 1.1780. When the positive level is higher than 1 and higher than the negative indicator, the overall price action is moving upward. When the negative level is higher than 1 and higher than the positive indicator, the overall price action is moving downward. The positive and negative levels have been moving in a manner consistent with upward movement for the stock The stock and indicators had been bearish for the past three weeks, but that trend is starting to end.

The stochastic oscillator K value is 5.0897 and D value is 6.4898. This is a cyclical oscillator that is highly accurate and can be used to identify overbought/oversold levels as well as pending reversals and short-term activity. I personally use anything above 80 as overbought and below 20 as oversold. When the K value is higher than the D value, the stock is trending up. When the D value is higher that the K value the stock is trending down. The stochastic well oversold and the stock should begin to move upward soon.

SPECIFIC ANALYSIS

I have created an algorithm (called the SAG gauge) which signals when stocks are truly overbought and oversold. The algorithm indicates when a particular stock meets multiple criteria culminating in an oversold or overbought signal. That signal will occur within a few trading days after the stock has begun to move upward. Recognizing this movement and pending signal can increase gains by entering early.

Upon back-testing this indicator, it has signaled oversold status 25 times dating back to 1986. The stock always gains at least 0.75% over the following 35 trading days after the indicator date. Eighty percent of the time the stock gains at least 8.75% and seventy percent of the time gains 9%.

Since 1998, this stock always gains a minimum of 1.76% when the RSI, positive and negative VI are simultaneously at their current level and moving in their current direction. This additional study requires the stochastic at the bottom of the chart above to be oversold as it is today too. Ten similar instances were found. The median move is 15.20% over 20 trading days. The last two times the stock bounced off its support line (which it did on July 11), the stock has achieved a minimum gain of 8.30% over the following 22 trading days.

Three of the ten instances we just covered occurred at the same time or within days of an oversold signal on the SAG gauge. These instances resulted in a minimal gain of 6.10% and median of 16.25%.

Considering the RSI, VI, stochastic levels, SAG gauge and historical similarities, the stock should see upward movement over the short to intermediate time period. Based on historical movement compared to current levels and the SAG gauge, the stock could gain at least 6% over the next 35 trading days if not sooner.

DISCLOSURE: Upon recognizing the pattern and movement, I entered a long position at the beginning of today's session. Historical movements and technical indicators should never be the sole basis for entering positions involving risk. You should not take a risk without fully understanding the system, market, and being disciplined. Make sure appropriate research is conducted prior to taking any risk in a marketplace.

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