Costco Wholesale Corporation (NASDAQ:COST) gapped up into blue skies on Thursday and rose about 2% of the open to reach a new all-time high of $603.78.
All-time highs generate excitement and interest that can translate into increased buying pressure and above average volume.
When a stock reaches an all-time high there is no oversupply, meaning every trader and investor in the stock is in a green position and there are no bag holders. Because the stock has never traded in the range, there is also no price history to act as resistance. This can equate to some traders making emotional-based decisions, which can lead to unexpected share price behavior.
When a trader has a position in a stock in blue skies there are a number of signals that can be watched to guide a trading plan:
RSI: The above average volume on a stock reaching a new all-time high often raises the relative strength index (RSI) to near or above the 70% mark indicating consolidation is needed. When a stock’s RSI exceeds 70% it is in overbought territory which is a sell signal for technical traders. Short-term traders may choose to exit their positions and reenter on the higher low, which helps to create some selling pressure.
Volume: It's expected there will be high volume when a stock makes a new all-time high, but massively high volume can indicate a volume climax, meaning bullish traders have become anxious and begin taking profits en mass. If there isn’t a volume climax, traders who are willing to hold through the consolidation that follows the all-time high will want to watch the stock’s daily volume. It's bullish when consolidation happens on low volume and bearish when lower prices come with high volume.
Candlesticks: When reaching an all-time high, technical traders watch for the candlestick created on the day that the high was made as well as on the days that follow. Candlesticks such as an inverted hammer, shooting star, hanging man, gravestone doji and bearish engulfing can indicate lower prices are on the horizon.
Support Levels: When a stock reaches a new all-time high its first support level is at its previous all-time high. Bullish technical traders feel more confident going forward when a stock holds above the level.
Patterns: Bullish traders will watch for new patterns to be created above the previous all-time high for guidance going forward. After making a new all-time high and then trading lower, there is new resistance above at the all-time high. A stock may consolidate into a bullish pattern such as a bull flag or pennant or create a bearish pattern such as an evening star or bearish engulfing formation.
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The Costco Chart: After reaching the new all-time high, Costco began to consolidate on lower timeframes by beginning to form a bull flag pattern on the hourly chart. If the hourly bull flag is recognized, the measured move is about 5%, which indicates the stock could reach the $625 area in the future.
- If Costco closes the trading session near its high-of-day it will print a bullish kicker candlestick, which could indicate higher prices will come again on Friday. If the stock closes the trading session at or below the $600 level, it will print a bearish candlestick due to the long upper wick.
- Regardless of when it happens, Costco will eventually need to print a higher low in the uptrend the stock has been trading in since Feb. 24. A pullback is likely to come sooner rather than later, however, because Costco’s relative strength index is measuring in at about 80%.
- Costco is trading on higher-than-average volume on lower timeframes, which indicates a higher level of investor interest but as stated above, could result in an eventual volume climax.
- Costco has resistance above at the new all-time high and support below at $586.32 and $566.55.
