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Trader sees Costco headed to new highs on earnings

VIDEO5:0305:03
After Costco stumble this month, technician sees return to highs ahead

Costco is about to hit new all-time highs, says TradingAnalysis.com founder Todd Gordon.

Shares of the big box retailer may have fallen more than 5% from the stock's Sept. 6 record high, but Gordon thinks the charts are signaling another big rally.

"[Costco has] pulled back to support and I think it's ready to head back to the highs heading into earnings," he said Wednesday on CNBC's "Trading Nation."

Costco reports quarterly earnings on Oct. 3.

Gordon is looking at a pullback for Costco that took the stock back to the $285 area, which he defines as support given that the level was an "old zone that was formerly resistance" during the summer.

But Gordon also says the consumer staples sector looks due for a bounce given a pullback to support in the $60.50 area.

"We also are seeing falling bond yields in the U.S. again, which will put those dividend payers of the staples back in focus," he added.

Given that implied volatility — the price of options — is elevated heading into earnings, Gordon plans to sell the Oct. 4 290-strike put and buy the Oct. 4 285-strike put for a credit of $1.98. This means that should Costco close above $290 on Oct. 4 expiration, then Gordon would make $198 on the trade. If Costco closes below $285 on expiration, then Gordon would lose about $302.

Despite the skewed risk reward ratio, Gordon's 290-strike put is essentially in the money, given that Costco was trading at around $287 on Wednesday.

The stock is up 30 percent year to date.