Costco Wholesale Bounces on Upgrade, but Technical Resistance Still Looms

03/18/2009 9:00 am EST


Nick Perry

Equity Options Trader, Schaeffer's Investment Research

Just like many of its other retail sector peers, Costco Wholesale Corporation (COST) caught a brokerage boost early Tuesday morning when Jefferies & Co. upgraded the stock from "hold" to "buy." As we headed into the last hour of trading, shares of the discount retailer had added 3.7% to trade at $43.68.

The brokerage firm is going out on a limb with its optimistic view of COST. Prior to today's upgrade, there was just one lonely "buy" rating from the 13 analysts following the security.

However, COST's lackluster price action justifies the generally skeptical stance among brokers. The equity has skidded lower under pressure from its ten-week moving average since mid-2008, and a recent rally in the shares seems to have lost momentum after meeting up with this trend line.

If more analysts decide to upwardly revise their ratings on the stock, it could provide a catalyst to propel COST through technical resistance. Price target increases could also draw new buying pressure to the shares. Thomson Reuters notes that the average 12-month price target is $45.38, a mild premium of 7.7% to Monday's close.

Another positive development for COST would be a close atop the 42.50 region (which seems likely at this point, but the market does have a pesky habit of making massive eleventh-hour swings). This strike is home to peak call open interest of 12,255 contracts in the March series, which is due to expire this Friday. If the shares can maintain a foothold north of this region during the next several sessions, the threat of options-related resistance from this strike would be rendered null and void, removing at least one obstacle from Costco's path higher.

By Nick Perry of Schaeffer’s Trading Floor Blog

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