Starbucks Corporation (SBUX) Stock Is a Dead Cat Bouncing

Advertisement

SBUX - Starbucks Corporation (SBUX) Stock Is a Dead Cat Bouncing

Source: Shutterstock

Starbucks Corporation (NASDAQ:SBUX) shares have been trying to find their footing ever since they were smacked 7% overnight last week. As is usually the case, the cause for the drubbing in SBUX stock was an earnings misstep. Starbucks failed to meet the Street’s expectations and was beaten handily.

Beat the Bell: Starbucks Corporation (SBUX)

But what of this week’s rally? Have the seeds of a new uptrend been planted? Was the recent plunge capitulation, a washing out of the weak-hands?

Bulls would certainly like to hope so. Unfortunately, I suspect they built their hope on a faulty foundation. Starbucks stock still looks mighty vulnerable to me.

Starbucks’ Charts

As you can see on the weekly chart, SBUX stock has been dead money for two years now. It has been a shoving match between two equally powerful opponents. And despite a few near-victories, we’ve yet to see a decisive winner to the bout.

That has left the stock trendless. Just look at those 20-week and 50-week moving averages crisscrossing in fence-sitting fashion. Make up your mind and start trending already!

SBUX stock chart weekly view
Click to Enlarge
Source: OptionsAnalytix

With last week’s tankage, Starbucks is now testing the lower end of its range. That, coupled with its oversold status, is likely the cause for this week’s rebound. But I think it’s a ruse, and we’re liable to see more bloodletting before a bona fide bottom takes root.

Allow me to make the case using the daily chart.

SBUX stock chart daily view
Click to Enlarge
Source: OptionsAnalytix

First, consider the trend. At $55.68, SBUX is submerged well below the 20-day, 50-day and 200-day moving averages. Not exactly the characteristics of a healthy stock, you know?

And if you were going to initiate counter-trend trades to capitalize on the oversold bounce, well, that ship has sailed. With this week’s pop, Starbucks has now rallied 5% off last week’s lows.

I don’t doubt we could climb another day or two. But too much resistance looms overhead for me to want to be a buyer here.

To me, $57.50 is the magic line in the sand. It’s the level that I think SBUX stock will have difficulty reclaiming for multiple reasons:

  • An old support zone rests in this area, which is now likely to become resistance.
  • The 20-day moving average rests near $57.50.
  • If Starbucks shares do somehow claw their way back to $57.50, they’ll be relatively overbought and due for another downturn anyway.

Now, we can also tack on the fact that we’re entering a seasonally weak time of the year with August and September. And then there’s the recent weakness from small-caps (the Russell 2000) which warrants a more cautious tone.

Here’s the bottom line: I think this rally is providing an attractive opportunity to initiate bearish SBUX plays.

How to Trade SBUX Stock

Despite falling after earnings, implied volatility is still elevated enough to make short premium strategies worthwhile. Starbucks’ IV rank is 27%. We can create a wide profit range by selling the Sep $57.50/$60 bear call spread for 30 cents.

Consider the position a bet that SBUX will sit below $57.50 at expiration. If you think the stock may rally further from here before plunging anew, then you could scale into the position. Maybe sell half the number of desired contracts at 30 cents and add the other half at 50 cents.

This technique will raise your average credit while improving your probability of profit. The max reward is limited to the initial 30 cents. The max risk is limited to $2.20 and will be forfeited if the stock climbs above $60. To minimize the damage, I suggest exiting SBUX stock on a break above $58.50.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.

For a free trial to the best trading community on the planet and Tyler’s current home, click here!


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/starbucks-corporation-sbux-stock-is-a-dead-cat-bouncing/.

©2024 InvestorPlace Media, LLC