Don’t Buy the Starbucks Stock Price Pop — It Will Fail

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SBUX stock - Don’t Buy the Starbucks Stock Price Pop — It Will Fail

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Source: Adrianna Calvo via Stock Snap

Starbucks Corporation (NASDAQ:SBUX) shares are on the ropes. A poor reception to its latest earnings release coupled with widespread weakness in equities upended the SBUX stock uptrend. And with bears now firmly in control, rallies like that seen this week are suspect. Fortunately, there’s a way to make Starbucks’ pain your gain.

Since peaking at $61.94 just before its late-January earnings, SBUX shares fell as much as 13.5% before finally rebounding this week. The plunge returned Starbucks to the lower end of its three-year range, breaching every major moving average in the process. With the 20-, 50- and 200-day moving averages now all pointing lower and numerous resistance levels looming overhead, we are officially in a sell-the-rally environment.

Should SBUX keep climbing the first two resistance zones it will encounter are $56.50 and $57.50. The former is an unfilled price gap, and the latter is where the 20-day and 200-day moving averages sit. To capitalize on the anticipated failure at either area, I like the idea of selling bear call spreads here. More on that in a minute.

Source: OptionsAnalytix

It’s worth noting that option premiums remain pumped. Although demand has ebbed during this week’s price rebound, at 58% SBUX’s implied volatility rank is still officially high. And that further increases the appeal of short option strategies.

With SBUX already up four days in a row, deploying bear trades now may not be a bad idea. But, you may want to wait for confirmation that the stock is rolling over before pulling the trigger. Consider using a break below the prior day’s low. If you’re teeing this up for Thursday, then $55.29 would be your trigger.

Fade SBUX With Bear Calls

If you’re looking for a high odds play to capitalize on another downswing in the stock, then sell the March $57.50/$60 bear call spread for around 39 cents. The max reward of 39 cents may not sound like a lot, but the cost (and risk) of the trade is a mere $2.11, so the potential return on investment is 18.5%. That’s appealing for a high probability trade like this.

To minimize the damage if Starbucks continues to rip higher exit on a break above the 50-day moving average at $58.23.

As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.

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