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Starbucks: Stuck in the Middle

Investors' best action on SBUX right now might be inaction


At one point this year — just at April’s downturn of broader equities — coffee retailer Starbucks (NASDAQ:SBUX) was up around 34% for the year. Fast forward less than four months, and the stock is almost flat for the year.

And from a technical point of view, it has broken some important support areas.

Not dissimilar to Apple (NASDAQ:AAPL), Starbucks was strong right out of the 2012 gate. Of course, the stock sports a beta of 0.9, so it wasn’t surprising to see the stock falter in spring along with the broader market. However, SBUX has not taken part in the summer rally thus far; in fact, it has completely gone the other way, further damaging the stock’s technical picture.

After announcing its fiscal Q3 results July 26, shares dropped 10% the following day. Earnings and revenues slightly missed analyst expectations, and Starbucks guided down its outlook for the current quarter as a result of the global slowdown.

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From a technical standpoint, as a result of the 10% drop on July 27, the stock broke below an area near $51 that acted as support since mid-May. At the same time, the stock also sliced right through its 200-day simple moving average, which until then had done a good job holding as support since April 2009.

The stock now sits above a support area near $45/$46 that was resistance in November and parts of December last year. In other words, the stock has now given up all of the gains since the broader market rally started in late December.

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The weekly chart sheds further light on where SBUX sits from a longer-term point of view.

For the most part, Starbucks stock has traded in a nicely upward-trending channel since early 2009. As investors became overly exuberant about SBUX’s (and the greater economy’s) growth prospects, the stock broke up and out of the channel in March, only to have fallen right back into that multiyear channel. This phenomena is called “return to the mean,” and such mean-reverting moves for the most part are healthy. The bottom of this up-trending channel coincides with the $45/$46 area of support (past resistance), and as such, it might be an area to watch closely.

It might be too early to buy into Starbucks, and too late to take in the higher-probability part of the selloff. Options players might find opportunity in using sideways-trading, strategies such as butterflies and calendar spreads, while investors and traders in the stock might do well exercising some patience and seeing how the $45 area holds or folds as support.

Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.

Article printed from InvestorPlace Media,

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