Friday, August 1, 2014

Intermediate-Term Bottom Formation Analysis

Is COST Completing Its Bottom, Or Is There More Downside Coming?

By Martha Stokes CMT

Costco Wholesale Corp. (NASDAQ: COST) started an intermediate-term correction in December 2013, after a strong 4-year moderate uptrend that had brief short-term corrections which helped sustain the trend technically. So far, most of 2014 has been a downtrend for COST.

Technical traders need to start studying the stock now, as it begins to show signs of improvement. Here are the key patterns that help identify a bottom formation underway:

The weekly chart below shows the correction from December 2013 to summer 2014 and the steady rise of the stock as it begins its bottom formation.

The daily chart has far more detail and helps technical traders recognize that this is a bottom underway. One huge factor is the fact that the lows have been rising, so higher lows have formed since April 2014 and the price action has become more consistent and is currently starting to compress just below the bottom completion resistance level.

The bottom completion resistance level tends to be strong resistance, shown on the chart below as a black horizontal line. This is the level from which the final capitulation by smaller lots started. Later, there is an attempt by High Frequency Traders to sell the stock down further on March 6, 2014, but it failed. HFTs are usually followed by the small funds and retail groups. The fact that the stock was sold down by these groups, but failed to break down below the prior low of February, indicates that there is some light quiet accumulation going on that kept the stock from dropping below the prior lowest low.

This is usually how bottoms begin to develop—as HFTs, small funds, and retail fail to trigger another strong move down due  to quiet accumulation, which holds the stock above the prior low.

This bottom is called a “bowl shape.” If you drew a line along the lows starting at the resistance level line, it would have a rounded shape from December to current. Bottoms that are shaped similar to a bowl tend to be very reliable bottoms. However, as it tests the resistance level, it is likely to retrace back down to weak support again before gaining sufficient energy and strength to break out above the bottoming resistance level.

COST's all-time high was about $126.00, so it is currently about 10 points from its all-time high. This is a consideration for position traders who use target-gain potential as part of the reward to risk analysis.

Learn more about candlestick pattern analysis HERE.

Trade Wisely,

Martha Stokes CMT

Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor & Developer of TechniTrader Stock Market Courses
TechniTrader is a MetaStock® partner

© 2014 Decisions Unlimited, Inc. DBA TechniTrader®. All rights reserved.

Disclaimer: All statements are the opinions of TechniTrader, its instructors, and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.

No comments: