Costco's recent bounce is a tactical retreat in a downtrend; short position targets retest of 900.

Your next big stock here is Costco, and we've talked a lot about the consumer and about trading at this club and warehouse level. How do you view Costco now, Don?

In fact, I would look for a short selling position. I'm using the latest method we call price rebound. It is actually somewhat the opposite of trading gold, where I look for a strong upward bounce in gold.

In this particular case with Costco, I am actually using the most recent rebound we have seen. Where did this backlash actually originate? Well, to begin with, Costco reached a level just below 1100, then dropped down to the 880 range, and now we are seeing a good bounce upwards.

Okay, I'll use that bounce to sell short. I think there is a downward trend that is still very much in place. I believe that this current rebound is nothing more than a tactical retreat.

And once again, I will proceed with short selling.

To do that, I would actually buy an out-of-the-money put spread. I like to use put option spreads outside the price range in this case to control volatility risk, limit my risk in the trade, and just to say: "Look, I think Costco will at least test the 900 range again."

And that is exactly what this deal was set up for.

So, I'm going to give myself a little of what I call "the gift of time". I will target the expiry date of December 18th, the expiry date of December 18th. I will buy put options at the 930 level.

Again, buy put options at 930, and sell put options at 920 against it. So, it is the price difference of a full put option with a bid of $10, at a borrow cost of $2.80. So, once again, it is a difference outside the price range through which we are looking to retest the 900 level as a minimum, in order for this trade to succeed.

Well, we are looking at a downward move of at least $20, or rather a downward move as low as $40. KG, when you look at the technical formation here, do you see any bearish signals?

Listen, I mean, Dan and I usually agree on a lot of these charts, but I'm going to have to disagree with him, at least on the daily chart for now. Here's why. If you look at it, this stock is the type that actually tends to consolidate and then break out either upwards or downwards.

We saw at this time last year that the stock was making lower highs as well as lower lows. But this stock found some trading volume and some buyers at around the 850 level. And I have already set that level.

We saw this upward breakout, then consolidation, and then that explosive peak where we reached the $1096 level. And since then, he has been retreating in successive steps. But here's why I'm more optimistic than pessimistic.

On September 25th, you will see this very large green candle with a bullish engulfing pattern. It has already closed above the 20-day moving average, which has been acting as a support zone.

We retested that moving average a few times and continued to rise. Today we are breaking through the 50 level. You are kind of looking at the 962 level, which is testing the 200-day moving average over the next couple of days.

You have the MACD indicator in a bullish formation with the 12-period exponential moving average above 26, and the RSI recording higher highs.

Now if we move to the weekly chart, I would give Dan perhaps a little bit of credibility here. The weekly chart somewhat shows this main upward trend, and the bullish flag pattern that we have come out of.

Returning and retesting that bullish flag could take you back to around the $900 level and even the $870 level before you rise again, and we see the 20-week moving average in blue acting as a resistance zone.

The only reason I say "not that fast" is that the MACD indicator looks like it's heading for a bullish crossover, and COSCO's weekly MACD crossovers usually translate to three or four weeks of positive price action before we see a pullback, no matter how small the crossover is.

This actually represents a good rule of thumb here. So, this is a big test. We are seeing a gradual upward pattern, but it is still an arrow in a major upward trend here.