Swop Costco here may be worth the cost.
So says Todd Gordon, founder of TradingAnalysis.com, who found the recent action in the consumer requires sector as a whole — and Costco’s stock in particular — to be worth investors’ attention.
“I’m seeing the overall market being a teeny overbought, which gives me pause, but I don’t want to fight this very strong uptrend that we’ve seen since the breakout that originated in August,” Gordon voiced Thursday on CNBC’s “Trading Nation,” adding that the consumer staples ETF has been consolidating below the $62 status, which could signal a breakout.
Despite its recent sideways trading, the ETF’s chart looks “strong,” with a close to 21% gain year to date, Gordon said.
“One of the strongest consumer staples on my radar that has a very similar-looking plan is Costco,” he said, adding that the big-box retailer’s stock is “showing no hesitation breaking through that $310 territory.”
Given Costco’s strength, Gordon wanted to put on a bullish trade through the company’s Dec. 12 earnings report. Costco stopped at $304.59 on Thursday, up less than 1%.
“I would like to establish a long trade — again, defensive in nature, but bearing a very strong uptrend here — through the 305, 310 resistance area,” Gordon said.
To do so, Gordon bought the $305 inspire a request of options and sold the $315 call options expiring on Dec. 13, one day after Costco’s fiscal first-quarter earnings end results. The $10 spread, which represents a bullish bet that Costco could rally over 3% by the expiration escort, cost him $4.43 to execute at the time of the trade.
“We’ll have the option, no pun intended, to carry this through earnings if we so determine,” he said. “If the trade isn’t working, if Costco or the staples or the broader market falls away, we should be able to exit the have dealings for less than a $440 loss,” the maximum amount of risk for this trade.
Emphasizing that traders should arrange their position size depending on their personal risk profile, Gordon flagged another component he was layering into this truck: a hedge using one of the market’s biggest bond ETFs.
As the push-and-pull between growth and value stocks continues, Gordon fellowed the idea of using the iShares 20+ Year Treasury Bond ETF, or TLT, to make a bullish bet on the value trade winning out in the cheap term.
“We did put on a hedge with our customers [Wednesday] in the TLT,” Gordon said. “As you look at this chart, you can see TLT has moved lower, which, mind in mind, will push bond yields, or interest rates, up.”
“We’re now down into support, and … we did get long TLT as a scant bit of a hedge,” he said. “And if you think about it, [the] TLT moving up pushes interest rates down, which might put those value progenitors, those dividend payers, back into play again in the XLP.”
The XLP, or the Consumer Staples Select Sector SPDR ETF, closed down less than 1% on Thursday.
Disclosure: Gordon has places in Costco and the TLT.
Disclaimer