Buy Costco Over Target

• Posted by Greg Harmon
• on October 4th, 2011

Costco ($COST) and Target ($TGT) have been wandering into each other’s space for years. Costco selling clothes and other items while target expands in groceries. Their charts show that Costco has been the winner over the last year and may be ready to make another move. Lets take a look.

Costco, $COST

Costco, $COST, has pulled back from a Double Top and has a Relative Strength Index (RSI) that is trying to hold in bullish territory, but with a Moving Average Convergence Divergence (MACD) that is crossed negative and growing. It has printed a couple of reversal signals, a inverted hammer and an doji, the last two days, and has Simple Moving Averages (SMA) that are rising and sloping higher, but it could still move lower. Costco also reports earnings before the market open Wednesday. Target, $TGT, is at least a few steps ahead of Costco, in moving lower. The RSI has moved well into bearish territory and the MACD is growing negative, supporting more downside. It also has the SMA’s sloping lower.

Target, $TGT

The picture gets a lot clearer when you look at a ratio chart of Costco against Target. The series of bull flags is evident in the move from the 1.475 to 1.525 flag up to 1.600, and then the move higher to 1.700. It is now breaking that flag higher and would have a target of 1.800 and resistance at 1.760. The one hesitation about just buying 100 shares of $COST and selling short 170 shares of $TGT is the shooting star doji printed Monday, a potential reversal. If it moves higher Tuesday, failing to confirm, then the trade has a good basis.

$COST vs $TGT

Risking to a ratio of 1.680 and looking for a target of 1.800 this trade has a reward to risk ratio of 3.3:1. Put another way, you risk $134 to make $441 on this trade using 100 shares of $COST and 170 shares of $TGT.

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