How Costco Stock Looks Headed In Q3 Earnings (And How To Play It After)

Costco Wholesale Corporation COST was soaring over 5% heading into its third-quarter financial results, set to print after the market closes on Thursday.

When the membership-only big-box retailer printed its second-quarter results on March 3, the stock slid over 3% the following trading day to print a higher low and then continued north to reach an all-time high of 612.27 on April 19.

For that quarter, Costco printed a big beat, reporting earnings per share of $2.92 on revenues of $51.9 billion, which beat the consensus estimate of $2.73 per share and revenues of $51.4 billion.

For the third quarter, the analysts estimate Costco will report earnings of $3.03 per share on revenues of $51.77 billion.

Heading into the event, Oppenheimer maintained its Outperform on Costco and lowered its price target to $500 and Deutsche Bank maintained its Hold rating on the stock and lowered its price target to $525. The lowest of the two price targets suggests about a 13% increase from the current share price.

The reaction Costco receives post-earnings is likely to be the deciding factor on whether the stock will trade in a bullish or bearish pattern for the time being, because although Costco has rallied about 15% higher over the past five trading days, the stock is still trading in a downtrend on the daily chart.

Of course, holding stocks or options over an earnings print is akin to gambling because stocks can react bullishly to an earnings miss and bearishly to an earnings beat. Options traders, particularly those who are holding close dated calls or puts, take on extra risk because the intuitions writing the options increase premiums to account for implied volatility.

The implied move for options of Costco expiring this week is 7.42%.

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The Costco Chart: Costco has been stuck in a steep and consistent downtrend since April 21, with the most recently lower high printed on May 13 at $498.79 and the most recent lower low was formed at the $406.51 level on May 20. Although Costco has soared up about 15% since formed the last lower low, the stock hasn’t consolidated to form a higher low, nor has it reached a higher high.

• Technical traders may have seen the sharp rise on the horizon because on May 20, Costco’s relative strength index (RSI) dropped to the 20% level. When a stock’s RSI falls below the 30% level it becomes oversold and when it reaches the 20% level, the stock is considered heavily oversold, which can be a buy signal.
• There is a gap directly above on Costco’s chart between $467.45 and $480.23. Gaps on charts fill about 90% of the time, which makes it likely the stock will rise up to fill the empty range in the future. If Costco gaps up following its earnings print, bullish traders may want to see the stock fall down briefly to fill the gap before continuing upwards.
• If the stock suffers a bearish reaction to its earnings, traders can watch to see if Costco forms a reversal candlestick, such as a doji or hammer candlestick, above the lower low to indicate a trend change or if Costco creates another lower low and continues in the downtrend.
• Costco has resistance above at $469.77 and $481.23 and support below at $459.59 and $444.07.
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