Going to Costco to Load up on Earnings Plays

Costco (ticker: $COST) reports earnings tomorrow before the market opens. Looking at the price action in the stock it appears to be in the start of a downtrend. Below is the daily chart as of 1:18 pm Tuesday.

Notice that it is creating a bearish engulfing candle today after a doji print Monday, right below the 82 support level. The key to this chart is that both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicator are suggesting more downside as well. There is support at 80 and then at the 76.62 Fibonacci area.

With a quick check to the weekly chart two factors support a potential downside move. The last four weeks of the up move have happened on decreasing volume and the the RSI looks to be rolling over. It is still early in the week but the start of a bearish weekly candle is promising.

For a low risk trade for earnings giving this set up consider buying the June 80/75 Put Spread for 93 cents. The implied volatility in the June options at 25% is not much more than that of the July’s at 21% and the historical at 15.17% so there will not be a huge volatility crush after earnings. If it does blow out and the stock moves to 85, buy back the spread Wednesday near 50c for a 40c loss. you could also try to hedge this by buying the stock in the after hours session. This trade only makes sense if you believe in the downside bias. Make up your own mind, it is your money.

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

If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.

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.

blog comments powered by Disqus
Dragonfly Caps Blog