he Consumer Staples Select Staples SPDR ETF (XLP) is bouncing off its 200-day moving average in an attempt to reverse the recent decline in the fund price. The main beneficiary of a reversal in the sector would be Costco (COST) , which has been an out performer in the consumer staples space.
Costco shares broke out of a horizontal channel pattern earlier in the month while the XLP, which had been trading in a similar price channel, failed in its attempt to break above its channel resistance level. Instead, the XLP pulled back to the pattern support line, while Costco headed higher.
If the XLP and the broader consumer staples sector are preparing for a bounce, it makes sense to jump on board Costco, and expect the stock to continue to outperform.
The daily chart shows both the XLP and Costco testing channel resistance earlier this month. Costco broke out and has continued higher while the XLP failed and has pulled back to the intersection of its channel support level and 200-day moving average.
The graph between the two price charts shows the out performance of Costco relative to the XLP over the last year. Moving average convergence/divergence reflects Costco’s positive price momentum. It has been tracking higher since July and this month moved above its center line.
Chaikin money flow has pulled back below its 21-period signal average but is still well into positive territory, suggesting continued buying interest.
Costco’s bullish channel breakout projects a price objective measured by taking the height of the channel and adding it to the breakout level. It targets the $172 area but there is a yawning downside gap that needs to be filled at $177.50. That second objective could be achieved with the help of a broader base recovery in the consumer staples space.