by Serge Berger | April 14, 2014 7:49 am
Earnings season is about to kick into full gear this week, which means you should be keeping a close eye on which companies are reporting on any given day. One to look out for soon: Starbucks (SBUX).
I’ve always found that holding near- to medium-term trading positions through any given earnings report is a losing strategy over time. A higher-probability strategy is to wait for earnings to pass, then evaluate whether the stock offers a valid trade. So, when I say that I’m looking at a setup in SBUX stock, keep in mind that Starbucks is expected to report earnings on April 24 — and I expect to be out of this trade before then.
The predominant theme across U.S. stocks is that things chased higher in 2013 are mostly lagging this year. In line with this theme is the underperformance of consumer discretionary stocks, to which Starbucks belongs. While there is rarely a lack of news surrounding SBUX stock, currently the next focus is Starbucks’ earnings announcement in a little less than two weeks.
From a technical perspective, the report might be just what I’m looking for, because it could mean that SBUX stock will trade a little more cleanly on just price action itself ahead of time.
Looking at Starbucks’ multiyear logarithmic chart, the major development that sticks out is how SBUX stock last week once again found its trendline support (which dates back to 2010) and is looking increasingly heavy. If the third time is a charm for the bears, then the stock might soon be breaking below this multiyear support line.
Zooming in on the daily chart, SBUX stock last week again reached its 2014 lows from early February and thus also has reached a crucial area of support for the near-term. From a technical and perspective, the February-March bounce in Starbucks stock offered institutional sellers — as well as others that wanted to lighten up on consumer cyclical stocks — an opportunity to get out at higher prices, which resulted in the ensuing selloff into last week’s low.
Starbucks bulls at this stage should be concerned because the downside velocity is meaningful, and with SBUX stock having closed at the very lows last week, it doesn’t look to have much (if any) support here in the immediate term.
For my part, I am looking to short SBUX stock for a slide toward the $65 mark over the course of the coming week. Should the stock jump back above the $70.50 area, I would be proven wrong.
Nice and defined risk — that’s the type of trade this current market environment requires.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
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