Starbucks (SBUX) stock has been on a steady diet of caffeinated beverages to keep its bull run lively. The momentum darling just notched yet another in a very long line of all-time highs.
The ability of SBUX stock to score a new high so quickly after a severe market correction is quite impressive to say the least. And it places Starbucks among the growing ranks of leading names who have been the first to rally into unforeseen territory.
This week’s surge in SBUX stock is the culmination of an inverted head-and-shoulders pattern months in the making. Although this chart formation is often tagged as a bottoming pattern, it occasionally presents itself as a continuation pattern.
Such is the case for Starbucks shares.
The pair of pivots creating the left shoulder and head illustrate the stock’s descent, while the right shoulder represents SBUX’s recovery. The increased aggression by dip buyers forming the higher pivot low marks a change in character and suggests higher prices are in the offing.
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With today’s neckline break, the pattern has now been completed. Traders looking for a price target for Starbucks stock can use the head and shoulders pattern for projections.
The height of the entire pattern was approximately $8. I’m omitting the insane down candle on Aug. 24 and instead calling the lower end of the pattern $51. The neckline sits at $59. If we add $8 to $59, that gives us an upside target of $67 for SBUX stock. Consider this the bull’s-eye for buyers in the coming months.
With the market rally long in the tooth, don’t be surprised if a bout of profit taking takes SBUX stock lower in the short run. Provided the stock remains above the right shoulder ($55), however, the upside projection is in play.
The Trade: SBUX Call Spread
One of the more efficient plays on the board for scoring big if Starbucks’ stock price rises close to $67 is a long $60/$65 call spread. To provide ample time for SBUX to reach its destination, you could use January options.
Buy the Jan $60/$65 call spread for $1.80 or better. The max risk is limited to the initial $1.80 and will be forfeited if SBUX sits below $60 at expiration. The max reward is limited to the distance between strikes minus the net debit, or $3.20, and will be captured if Starbucks stock rises above $65 by expiration.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
