Shares of coffee retailer Starbucks Corporation (NASDAQ:SBUX) jumped nearly 2.6% on Friday, May 19 … strangely, on the back of a verdict that demanded the company pay $100,000 to a woman who suffered burns from a hot coffee spill. But importantly, the move in SBUX stock resulted in a B2 Reversal Buy signal (my proprietary indicator) and also left a bullish tone behind on the weekly chart.
All of this argues for a break higher in Starbucks shares that traders can use to score profits.
The short version of the story: Back in 2014, a woman suffered first- and second-degree burns after a Starbucks coffee cup lid popped off, causing coffee to spill on her lap. Her attorneys — who were arguing for the company to warn customers about the potential for the lids to come off, which is not an infrequent complaint for the coffee chain — said the liquid was 190 degrees at the time of the spill.
On Friday, a jury awarded her $85,000 for pain and disfigurement, and $15,000 to pay for medical bills.
To be clear, whether this lawsuit resolution was enough to get SBUX stock moving into a new swing higher is too early to tell. However, judging from the bullish price action, it is clear that at least some investors were breathing a sigh of relief — a sign that some expected a much worse outcome.
Fundamental analysts will argue that the outcome of this lawsuit does not change anything (better or worse). They might be right. But through the lens of technical analysis, we can’t ignore the bullish undertone the headline created.
Let’s look at the stock!
SBUX Stock Charts
On the multiyear weekly chart below, we see that after topping out in October 2015, Starbucks fell fell into a prolonged period of consolidation.
Many an analyst over the ensuing 12 to 15 months had called for a move to fresh all-time highs. However, investors were clearly exhausted and skeptical about giving the stock new legs.
Through this multiyear, lens we see that Starbucks stock from October 2015 into the November 2016 lows did correct 20%, but this merely led to an important higher low in the stock. In mid-April of this year, SBUX finally managed to break past the black diagonal resistance line on the chart. That’s what gave the bulls better hope for a more sustainable move higher.
On the daily chart, we see that SBUX stock rallied right into its April 27 earnings report, which was promptly followed by a gap-down that pushed the stock into a new multiweek consolidation phase.
However, last Thursday, May 18, the stock closed well off its intraday lows and thus respected horizontal support around the $59 area, which formerly had acted as resistance. The following day, the stock gapped higher and rallied nearly 2.6%.
This type of seller exhaustion followed by strong buying is a classic buy signal, as per my proprietary B2 Reversal Indicator. I believe this argues for SBUX stock to move higher toward the $64-$65 area as a first upside price target.
Any sharp bearish reversal on a daily closing basis that would erase much of the rally from May 19 should serve as a stop-loss signal.
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