We reviewed the charts of Costco Wholesale (COST) ahead of earnings on March 2 where we wrote that "The charts of COST look positive and traders could go long COST ahead of earnings risking to $490." COST did rally in the past month but now a change in our technical strategy is needed as bearish divergences have appeared.
Let's check.
In the updated daily bar chart of COST, below, we can see that the shares improved the past month but price is only one thing we watch. COST made a slight new 52-week high but trading volume did not expand.
The On-Balance-Volume (OBV) line has not made a new high to confirm the new price high and that is a bearish divergence -- the new price high is not matched by the movement of the indicator. The 12-day price momentum study shows roughly equal highs from February to March even though prices made new highs - this too is a bearish divergence.
In the weekly Japanese candlestick chart of COST, below, we can see an upper shadow on the latest weekly candle. This tells us that traders rejected the highs above $575.
The weekly OBV line looks like it is leveling off in early March. The 12-week price momentum study is showing a much lower price bar versus December giving us a bearish divergence.
In this daily Point and Figure chart of COST, below, we can see a potential upside price target of $649. A pullback to $561.29 could mean a rally failure.
In this weekly Point and Figure chart of COST, below, we can see a potential $789 price target but a reversal is possible here too.
Bottom-line strategy: Traders who are long COST from our earlier buy recommendation should book profits now. Prices have not reached out targets but a number of bearish divergences are telling us to change our strategy. Sell out and then sit on the sidelines.
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