There’s no good way of saying it: Starbucks Corporation (NASDAQ:SBUX) is flashing some grim charts heading into its fiscal fourth-quarter earnings report tonight. So unless the Seattle-based coffee company posts stellar numbers, further weakness in Starbucks stock may be in order.
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Since peaking at $64 last fall, the Starbucks stock price has gradually descended 18% to its current perch. Although SBUX is coming dangerously close to bear country (a 20% drop), a long-term view demands some optimism.
How can you get mad at a stock that has grown from $3.53 in 2008 to $64? Surely an 18% correction after such a gargantuan gain is warranted, no?
Consider it a well-deserved respite for Starbucks stock after such an arduous, gravity-defying climb.
While the daily chart of SBUX certainly is flashing some warning signs, the weekly chart remains in bullish hands. Major support looms large at the $52 level, so that’s the threshold to watch going into earnings tonight. If CEO Howard Schultz & Co. fail to live up to the Street’s expectations and support gives way, watch out below!
To fully right the daily ship, Starbucks stock needs to clear the 50-day moving average ($54), and ideally, the 200-day moving average ($56.50). Until both thresholds are surpassed, I would continue to view rallies with skepticism.
SBUX Price Expectations
Demand for Starbucks stock options provides insight into just how much the ubiquitous coffeehouse is expected to gap on earnings.
The Nov 4 weekly options that expire end of day Friday are pricing in a $2.50 move. Since SBUX’s stock price is sitting at $52.50, that translates into a 4.8% move. Now, if we add and subtract the $2.50 from the current stock price, we can identify the price range that SBUX “should” trade in: $50 to $55. The odds suggest that a rip above $55 or plunge below $50 is unlikely.
For the record, earnings estimates for tonight’s call stand at 54 cents per share.
How to Trade Starbucks Stock
Guessing the direction of an earnings gap is always a crap shoot. Selling options using out-of-the-money strikes is one way to grab an edge if you want to take a shot.
Suppose with SBUX’s daily trend pointing lower and the rest of the market under pressure, you want to lean bearish tonight.
Sell the Dec $55/$57.50 bear call spread for 52 cents credit. Consider it a bet that Starbucks stock sits below $55 at Dec expiration. The reward is limited to the initial 52-cent credit. The risk is limited to the spread width minus the credit, or $1.98.
To limit the risk, bail if SBUX stock pops above the 200-day moving average at $56.50.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
