Jim Cramer knows that sometimes the stock market does weird things. Among the strangest is the unusual connection between Costco and the dollar index, which suggests the stock could be ready to roar.
To get a full picture from a technical perspective, Cramer spoke with Larry Williams to figure out what could be in store for Costco's stock. Williams has traded stocks, commodities and futures for over 50 years, written 11 books, created various technical indicators used in the industry and teaches investors about the market on his website IReallyTrade.com.
When Williams looked at the charts for Costco, he couldn't help but notice the inter-market relationship with the dollar index. When the dollar is strong, Costco tends to perform well. The dollar index measures the value of the U.S. dollar versus a basket of the next six largest currencies.
"If you project this relationship forward given the recent strength in the dollar, Williams thinks that Costco could be on the verge of a significant rally," the "Mad Money" host said.
Looking at the daily chart of Costco, Williams found a number of signs that suggested the stock could be ready to run. Costco's stock fell on Friday, but bounced back on Monday. Williams said these reversals often mark the start of a significant trend change.
The action told Williams that Costco could be ready to roar after sitting in a neutral position for months.
Williams also looked at the proprietary measure of professional accumulation, which indicates whether big institutional investors are buying or selling. Indicators flagged to Williams that institutional money managers were unloading the stock from late August to early September. However, in the past five weeks they have bought Costco steadily again.
Additionally, he looked at the Williams Percent R oscillator, which is a momentum indicator that measures if a stock has become oversold. It was developed by Williams himself, and it showed that Costco went into overbought territory when it spiked on Monday.
Williams thinks that more weakness like the stock had on Tuesday could put it back into an oversold position, at which point he would be a buyer.
Cramer owns the stock for his charitable trust because it is a well-run company that had a decent quarter and a strong value proposition. He found the stock attractive around $151 a share, and even more if it pulls back to the $140s.
"When the technical and the fundamentals align, that is often a sign that you've got a good idea on your hands, so if you don't own Costco, I'd recommend buying some at these levels and then waiting for the next market-wide pullback to buy more," Cramer said.
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