Last Thursday we took a look at Costco (COST) (MorningWord 9/29/16: COST’$ Cut) into its into their fiscal Q4 results that evening. The stock was clearly oversold into the print, down 13% from its August highs, and it didn’t take much to cause a bounce. Which it got, to the tune of 3.5% on results that were not as bad as expected:
For those of you that looking at charts feels like Tarot card reading, at their simplest they can be downright useful for trying to gauge entry and exits on trades at technical support and resistance levels. Looking at the one year below, COST’s gap Friday morning stopped on a dime at $155, which has been kind of a level for the stock, but also right at its 300 day moving average (yellow):
Charts are an important input into the process of choosing strikes for options trades. That has only gworn in recent years as algorithmic/automated trading has added to buying and selling at commonly understood levels.
As for COST’s good news last week, most of the gains evaporated this week is less than stellar price action. A break of Thursday’s closing low and I suspect we will see the stock in the low $14os before the year is out.
With the fear of an oversold bounce in COST, we chose to focus on the XRT, the S&P Retail etf (What’s In Store for Box Stores? – XRT), for a way to express our bearish thesis in retail. We believe the fundamentals for the sector are already fragile, suggesting a very promotional holiday selling season.
Just as COST was rejected at its 200 day moving average, XRT appears to be getting some support near its. We will keep this trade on a short leash, trying to adhere to our mental stop of 50% of premium at risk, but nothing we have seen of late by way of earnings (NKE, FINL & COST) lead us to believe we should be altering our view on the sector and the inability of COST to hold its bounce, and XRT’s lack of bounce entirely gives us reason to be patient for a breakdown: