DailyPlay – Costco Wholesale Corp (COST) – October 11th, 2021

View COST Trade

 Bearish – COST – $451.85

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Market Outlook:

An eventful week for equities saw the major indices end the week in the green. SPY and QQQ have declined since early September and managed to find support in recent days to break above their respective 100 D MA’s. The major event last week was the jobs numbers which were significantly lower than expected. Analysts were expecting a 500k increase in jobs but the actual figure came out at 184k. While this figure does provide evidence of keeping interest rates at bay, SPY and QQQ declined on Friday. The bond selloff continued on Friday which saw yields rise providing some fuel for the Financial sector. Sector rotation indicates a broadening recovery with 7 sectors in the Improving and Leading categories and 4 in the Lagging and Weakening categories. Financials and Energy are providing leadership thanks to higher rates and surging oil prices.

COST Bearish Trade Idea:
Our bearish DailyPlay trade is Costco Wholesale Corp (COST). From a technical perspective, COST is losing momentum after a strong rally from March this year. The deceleration in weekly and daily momentum points to further downside. Price ran into resistance at $467 and formed a double top on the daily timeframe before continuing lower. COST is also trading at a relatively high valuation (40x PE) compared to its 5 year average of 33x Earnings. View COST Trade

Sector Outlook

The Relative Rotation Graph (RRG) for sector rotation indicates that a broadening sector leadership with 7 sectors in the Improving and Leading categories and 4 sectors in the Lagging and Weakening categories.

Leading (positive relative trend and positive relative momentum): Industrials joined Financials and Energy in this sector and are showing strong momentum. A slight decrease in momentum in Financials and Energy. 

Weakening (positive relative strength and negative relative momentum): Discretionary rotated out of the Leading category due to poor momentum and relative strength.

Lagging (negative relative trend and negative relative momentum): 3 sectors are in the lagging category – Technology, Healthcare and Real Estate remain in the lagging category.

Improving (negative relative trend and positive relative momentum): 4 sectors are now in the Improving category – Materials, Communications, Utilities, and Staples. Industrials and Materials are experiencing strong momentum and growing relative strength.

XLE

Energy Sector revisits a major level from 2019, the $56-57 support and resistance zone that has held for more than 2 years. A break above this zone would put energy back towards $68 and $72 upside targets with oil prices continuing to climb. 

XLB

Both Materials and Industrials show similar price action. Lower highs from the May top, with rejection at its 21D SMA suggests a reversal lower towards its 100 and 150D MAs. 

Market Observations

  • STX – Break below its $80 major support level suggests further downside with negative momentum. 
  • CRWD – Rejection at $250 with the 21D MA crossing below the 50D MA suggests momentum has shifted to the bearish side. 
  • SCHW – Breakout above its $76 resistance and all-time highs suggests further upside with positive momentum from higher interest rates. 

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Tony Zhang