Thursday, October 30, 2014

COST: Rushing up the trend

Costco Wholesale Corp. (COST) runs stores that are amazing places: Huge warehouses filled with an equally huge selection of goods that vary little from country to country. It's an innovative company, the sort of corporate story that makes me want to trade it, and a chart that shows the stock price has been scrambling along the trend in a rush that leaves little chance for a pause.

The Chart

My main purpose in using Elliott wave analysis is to answer a single question: How far along is the trend? From this, I get a since of the relative likelihood of a correction.

The COST chart is a picture of exuberance. So strong has the uptrend been in 2009 that the corrections are all shallow and undiferentiated in magnitude. This is makes the analysis difficult.

Click on chart to enlarge.
COST 6 years 7 months weekly bars (left), 9 months daily bars right)

The count I chosen places COST in the final wave, 5 {+1} of wave 3 {+2}, the middle wave of the wave 3 {+2} rise from April 8.

I've chosen my analysis in a way so that the waves are balanced, but a slight change in my internal count would place COST in wave 5 {+2}, suggesting that a correction of yet higher degree is imminent. Middle waves, the 3rds, are far higher probability trades.

The difference is minimal. A correction of wave 3 {+2} takes back a portion of the rise from $110.36. A higher-degree correction means that wave 5 {+3} has ended, which in turn marks the end of the entire rise from $31.18 that began in march 2009.

There is a huge difference in correcting a rise from $110.36, the best case, and from $31.18, the worst case. In the best case, a shallow 38% correction might take the price down to $124. In the second case, a similar correction might drop the price to $94..

At this point, I shall write a brief description of the company, and then go to a decision. I know what I need to know.

The Company

Costo, headquartered in Issaquah, Washington, operates stores in eight countries, using large warehouse style displays and requiring membership of shoppers.

They're huge, and they have an astounding variety of merchandise.

An odd quirk: I've been to Costco stores in Oregon in the northwest United States and in Fukuoka, Japan in western Japan. Both look exactly alike, down to the products on sale. Despite the lack of any compromise with Japanese cultural sensibilities, people in Fukuoka flock to the store, standing in long lines to order inexpensive pizza and hot dogs from the in-store diner before heading to the checkout lanes with huge carts overflowing with stuff.

Costco appears on my supplemental list of innovative companies because of favorable mentions in the fascinating book whose 2nd edition was published earlier this year, Firms of Endearment.

Decision for My Account

I'm big on innovation and love Costco, but this trend is quite mature, whether I use the best case or worst case scenario, and I'm unwilling to take the risk of being caught in a huge correction with a  position that could be in my portfolio for months. I won't be opening a bull position in Costo.

A pity, really. I love corporate stories as much as the next private trader, but when it comes decision-making, at my trading desk the chart rules.

-- Tim Bovee, Portland, Oregon, Oct. 30, 2014


My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my shorter-term trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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