Costco Wholesale Corporation (NASDAQ: COST)

Costco Wholesale Corporation operates membership warehouses. The company offers branded and private-label products in a range of merchandise categories. It offers candy, snack foods, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies; appliances, electronics, health and beauty aids, hardware, office supplies, cameras, garden and patio, sporting goods, toys, seasonal items, and automotive supplies; dry and institutionally packaged foods; apparel, domestics, jewelry, house wares, media, home furnishings, and small appliances; and meat, bakery, deli, and produce. The company also operates gas stations, pharmacies, food courts, optical dispensing centers, one-hour photo centers, and hearing aid centers; and travel businesses.

Please take a look at the 1-year chart of COST (Costco Wholesale Corporation) below with my added notations:

1-year chart of COST (Costco Wholesale Corporation)

Over the last 9 months COST has created a key level of support at $110 (blue) and that $110 level is also the “neckline” support for COST’s H&S reversal pattern. Above the neckline you will notice the H&S pattern itself (purple). Rather than just 1 peak, COST’s left shoulder formed a “complex” shoulder with more than one peak.

Remember, patterns such as an H&S need to confirm to have the meaning that they imply. Confirmation of the H&S would occur if the stock were to break below its $110 support.

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The Tale of the Tape: COST seems to have formed a head & shoulders pattern. Although a long trade could be made at $110, the pattern implies that the stock might be preparing to break lower. A short trade could be entered on a solid move below the $110 “neckline” support.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Follow me on Twitter: @cmtstockcoach