Shares of coffee giant Starbucks Corporation (NASDAQ:SBUX), which gained nearly 50% in 2015, have continued to show relative strength in the new year. After last week’s earnings report, Starbucks stock managed to hold a crucial near-term technical and psychological price support level — a level that active investors and traders could now play SBUX against on the long side.
Furthermore, with the broader US stock market in bounce mode after last Wednesday’s bullish reversal, SBUX stock could be used as a proxy stock to play the broader market bounce.
When Starbucks reported its latest earnings last week, the company beat earnings expectations by a penny per share, and sales of $5.40 billion came in line with expectations. On the outlook, SBUX guided 2 cents per share below analyst expectations … but judging from the stock’s positive reaction last Friday, traders weren’t too upset.
Bears on Starbucks stock continue to point toward growth concerns in Asia, while bulls at least in part focus on the success of Starbucks’ mobile payment strategy.
When correlation among stocks and risk assets in general increases as a direct result of higher volatility, I tend to strongly favor playing the markets using index or sector/industry ETFs as opposed to single-name stocks. But in the case of Starbucks stock, given that the company has already reported its earnings and has lots of well-defined technical support, SBUX is the exception to this rule.
As much as I see SBUX stock as a near- to medium-term bounce candidate, for perspective we must first understand where the stock trades in the bigger picture.
Starbucks Stock Charts
On the multiyear weekly chart, we see that after a steep rally from 2009 through 2014, in 2015, Starbucks stock further steepened its slope and as a result broke out and above the multiyear trading channel. As I always say each and every time a slope goes from steep to vertical, it’s only a matter of time until gravity kicks in and drags the stock lower.
From a momentum perspective, note that Starbucks’ higher high last October/November was not confirmed by the Relative Strength Index at the bottom of the chart, which made a notable lower high. Ultimately, SBUX looks to mean-revert back into the mid- to high $40s at some point in 2016.
Moving on to the daily chart, we see that SBUX stock last week left a long daily tail behind on Wednesday as the broader stock market also began lifting off its lows. For Starbucks stock, however, the bullish reversal took place right at the red 200-day moving average, just as it did last August.
Last Friday, as a reaction to the earnings report, SBUX first traded down but by day’s end fought back and managed to close marginally higher on the day, thus giving us a confirmation buying day.
Active investors and traders could now consider buying the stock near last week’s closing levels for an initial bounce up toward the $62 mark while using the red 200-day moving average around $56.20 on a daily closing basis as a well-defined stop-loss area.
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