Bull Signal Shows Costco Stock Has Room to Run

Costco recently pulled back to a historically bullish trendline

Deputy Editor
Dec 9, 2020 at 2:59 PM
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The shares of Costco Wholesale Corporation (NASDAQ:COST) are down 0.8%, last seen trading at $374.42, cooling off from their Dec. 1 all-time high of $388.07. And while Costco stock's 10-day moving average has emerged as a layer of resistance over the last five sessions, the equity has brushed off the pandemic and managed a 30.9% rise in 2020. The good news is that a longer-term trendline has solidified itself as support, and if history tells us anything, it could springboard the equity toward another round of fresh record highs.

COST Chart December 9

More specifically, Costco stock is within one standard deviation of its 70-day moving average. According to Schaeffer's Senior Quantitative Analyst Chris Prybal, COST has tested support at this trendline seven other times over the past three years. The stock was higher a month later 71% of the time, and averaged a 6.2% gain for that time period. A move of similar magnitude from COST's current perch would put the equity at a brand new all-time high of $397.63.

In the options pits, the preference for puts is ample. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows the stock sports a 50-day put/call volume ratio that ranks higher than 99% of readings in its annual range. This indicates an unusually healthy appetite for long puts over the last 10 weeks. 

Echoing this, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.07 sits higher than 80% of readings from the past year. This means short-term option traders have rarely been more put-biased. An unwinding of this bearish attention could push the equity even higher.

What's more, options traders are pricing in relatively low volatility expectations at the moment, per the security's Schaeffer's Volatility Index (SVI) of 27%, which sits in the 19th percentile of all other annual readings. However, the equity's Schaeffer's Volatility Scorecard (SVS) sits at a low 13 out of 100. This means the stock has greatly disappointed option traders' volatility expectations during the past year.


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