Against a backdrop of slowing economic growth and a long-in-the-tooth cyclical bull market, consumer discretionary stocks deserve a very watchful eye right now. That even includes beloved coffee giant Starbucks Corporation (NASDAQ:SBUX), which while still a growth story might not be able to defy gravity when the broader consumer discretionary sector hits the wall.
In fact, SBUX stock is now flashing some noteworthy warning signals that those long the stock should respect — and that short sellers can use to make a good buck on a mean-reversion trade lower.
Getting right to it, then: Starbucks stock has gained 25% year-to-date, and as recently as a couple of days ago, it was up about 10% since its early April 2-for-1 stock split.
SBUX continues to reiterate steep growth plans that few analysts are yet willing to disagree with. In particular focus has been Starbucks’ mobile strategy, allowing customers to order online and pick up at their nearest location. Other analysts are calling for a large share buyback program, which if and when announced would likely boost SBUX stock … but still would come in the face of a cyclically slowing U.S. (and global) economy.
To be clear, I believe in Starbucks as a longer-term growth story that will see its stock soar much higher over time, but the weakening economic growth (rate of change) coupled with the warnings signs on the below charts has me thinking that the next more sustainable leg higher will likely come off lower price levels.
SBUX Stock Charts
On the multiyear weekly chart, we see that the rally in the Starbucks stock price so far in 2015 has taken the chart’s slope to a near-vertical angle that led to a breakout move above its longer-term uptrending channel.
Momentum as represented by the Relative Strength Index (RSI) at the bottom of the chart, however, has been making a series of lower highs since 2012 and thus doesn’t support this overshooting of SBUX in the bigger picture.
On the daily chart, we see that SBUX stock has rallied just about 50% since last October as the stock broke out of a 12-month consolidation phase. While the breakout no doubt was constructive, it has since reached the 61.8% Fibonacci extension point — an area where many breakout rallies begin to stall and consolidate lower in price.
More specifically, SBUX stock recently just about extended 61.8% of its 2012-13 rally (blue arrow) above its 2013 highs. If that sounds too technical for you, just know that Fibonacci numbers have a strong tendency to work, particularly on the longer-term charts.
Investors long Starbucks stock would be wise to respect my points from above and take at least partial profits or have risk-management measures in place.
Active investors looking to sell SBUX stock short would first want to see some buying exhaustion in price action, which I currently define as a bearish reversal on the weekly charts or a close below the $50 area. That would then set up a better mean-reversion trade into the mid- to low $40s.
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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.
