Costco Wholesale Corporation (COST) was on a tear upwards recently as prices pierced the $150 level for the first time and buyers jumped on for the ride.
The spike higher was partly due to fundamental news, internal news, as the company announced recently a substantial debt offering and the proceeds to be used for paying dividends on the 25th of February 2015. However, there’s a catch. In order for one to qualify for dividend payment, you need to be registered as a shareholder by the 9th of February 2015. This opens a window of opportunity for speculative trading.
The above suggests that the recent spike was actually news-driven and after the 9th February, which comes next Monday, the path of least resistance would be that the stock is going to be dumped as the registration date is passing.
Looking at the technical picture, it can be seen that COST formed a contracting triangle before the break higher, and that triangle has specific characteristics, in the sense that it is an irregular one (wave a smaller than wave b), suggesting limiting price action to follow.
These kinds of triangles are appearing in zigzags as b waves or impulsive moves as 4th waves, and in both cases, the spike higher should be discounted after the measured move (the thrust of the triangle is completed).
Well, the thrust of the triangle indeed is completed with the move above the $150 level and the idea is that price should retrace now all the way into the triangle’s apex, hence, lower values should be expected.
Therefore, put options are the name of the game here but starting with the close of the trading day on the 9th of February and having an end of the week expiration date (next Friday, on the 13th of February, when the US equity markets close).
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Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
