COST Chart Analysis & Swing Trades

COST Chart Analysis

After a beating earnings on most metrics, COST share price dropped more than 5%. The dropped was contained to the channel that COST had been trading in since October of 2014, leading me to believe that it will rebound with a playable bounce.

Update

Out today, maybe +70% analysis to come soon.

Thesis

The COST drop will meet support at the lower trend line of it’s three year old channel, and will bounce in the near term to at least a gap fill of $165.The thesis is strengthened with the next green candle which will confirm bullish MACD divergence. The thesis breaks down if price action falls 2.5-3% below the lower trend line of the channel.

Entry Price

Price action from Monday 10/9/17 would indicate that the share price should hold the lower trend line support, however, we’ve seen minor breaks of this support several times over the past 2 years, but these breaks resulted in a quick return to trend line support, usually within 1-2 days. Therefore, entry is when the stock price is between 154.35-157.43. For a safer trade that is less likely to be stopped out, the entry price is the same, but we will look for some kind of confirmation that the trend line support will hold. Confirmation would be the next close above the trend line, which will confirm bullish MACD divergence.

Target Price

At the very least, I think that it’s reasonable to expect a gap fill to $165.14. After the target price is reach, we’ll watch RSI to look for slowing momentum of the new rise. Ideally, there will be a hard rebound and the momentum will carry the price through previous resistance around $165.5, possible allowing it to fill the second gap. Resistance may be encountered around $159 and at the 200MA ($162).

Option Plays

It would be ideal to select a contract that won’t experience too much theta decay if the stock is slow to fill fill the gap to $164.14. Grabbing the 160 strike on the contract expiring NOV 24 would be the ideal play, as it’s a nice balance between paying high premium for JAN and allowing delta time to increase to hopefully negate theta decay as it nears expiration. If the rise is more immediate, the longer term option will allow for a possible second gap fill above $170. If price action remains stagnant going towards the end of the month, this option would need to be sold simply to prevent time decay.

Summary

Enter the swing trade long after bullish MACD divergence is confirmed. If trading options, enter the long 15 DEC 160C contract. Stop loss should be set 3% below the lower trend line after entry, which would be approximately $149 depending on when it is confirmed.

Overall Market Considerations

Obviously the market is stretched. It’s possible the short term uptrend will continue or that it will consolidate. Either is fine for this play. However, if a correction looks imminent, it may be wise to take profits early or bail completely and look for a more bearish trade to enter. Watch price action carefully if SPY drops below $252 or if XRT is looked to bury the $40 support line.

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