Choosing Costco over Target

This is a choice that many make day to day. Should I choose the bare bones, big box, big quantity model at Costco (ticker: $COST) or the relatively nicely appointed Target (ticker: $TGT) with it’s donut and coffee shops on site. Both are big discounters covering a wide range of products. But investors have been betting on Costco since the beginning of the year and it looks like they are about to up the ante. Below is a ratio chart of $COST vs $TGT since mid November. After breaking

COST vs TGT

out of a range at the beginning of the year the ratio has been steadily rising until leveling off in mid May. It is now forming an ascending triangle with a top at 1.69. The technicals suggest it may break the top of that triangle and run higher. The Relative Strength Index (RSI) is rising and the Moving Average Convergence Divergence (MACD) is crossing positive. Both support an upside move in the ratio. Also as the triangle apex consolidates the volume has been declining. If it gets through the resistance at 1.69 then the pattern would suggest a target of 1.78. How do you play this?

Trade: Buy 3 COST and sell 5 TGT with a target of 1.78 and a stop loss at 1.675 on a break of 1.69

This trade is cash neutral and at the target returns $11.78-12.58 per pair against risk of $2.03-2.04, for a reward to risk ratio of at least 5.77:1.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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