On the surface, it’s an unlikely pairs trade. Nevertheless, a piping hot Starbucks (NASDAQ:SBUX) and drilling in the US Oil Fund (NYSEARCA:USO) is offering a strong “reversion to the green” on the price chart for traders shorting SBUX stock and going long USO.
Let me explain.
Admittedly, it sounds odd — shorting shares of Starbucks and pairing it with a long in USO stock. But in a roundabout way, they’re interconnected as a spread play within the commodities market. Sure, I’m pushing the logic a bit. But Starbucks is the world’s largest buyer of coffee. And the USO is a pure play on black gold within the universe of exchange-traded funds.
One of the main reasons for this stock pairs strategy is that both Starbucks and USO are more connected than ever right now. By that I mean to say I see a strong technical-based reversion to the mean or “green” if you look at the profit potential in shorting SBUX stock and going long USO stock today.
Pairs Stock Strategy Short: SBUX Stock
So, why is SBUX a short? Reviewing the extended weekly chart it’s easy enough to appreciate that SBUX stock is no stranger to pulling the rug out from traders baited into buying or shorting classic-looking chart patterns.
From 2017’s failed cup-with-handle, which scorched bulls buying SBUX stock, to early 2018’s botched bearish head-and-shoulders breakdown, the only consistent trend in Starbucks is fading the trend when the pattern looks too good to be true. And currently that situation is setting up once more.
Over the past several weeks and while the broader market and other large-cap household favorites like Apple (NASDAQ:AAPL), Caterpillar (NYSE:CAT) or Netflix (NASDAQ:NFLX) have, for lack of a better description, been ice cold, Starbucks has miraculously been the flavor of the day and piping hot with investors.
Technically, the renewed enthusiasm for shares has allowed SBUX stock to settle into a flat and tight base of six weeks while finding support from an extended resistance line. But given SBUX’s past pattern-based shenanigans, the interpretation is Starbucks is serving up something too good to be true for bulls.
Lastly, and lending support to shorting, remember we’re not looking at the price chart of a utility play without its fair share of trade war exposure. Also, SBUX stock likely has additional embedded risk in its share price if today’s recession chatter finds consumers cutting down on their discretionary spending and those afternoon mocha espresso double lattes.
Ultimately, the overall evidence supports fading today’s bullish narrative on the price chart and shorting Starbucks shares on a technical breakdown below $65. And given the historical precedent, I’d be even more enthusiastic to short SBUX stock if a breakout prone to failure occurs first.
Pairs Stock Strategy Long: USO Stock
I can’t keep up or be bothered with all the reasons why oil and an in-tow USO stock have been getting crushed. From China, OPEC, global growth concerns or who knows what else, there are simply too many variables affecting the commodity for me to think I have a fighting chance of pricing USO on a fundamental basis.
Seriously, all I’m confident about is that in six months, headlines will have a host of reasons in hindsight why oil has done what’s it has done for the period. And guess what? If history is any indicator, that news and price action is likely to look a good deal different from today’s narrative.
Looking at the USO stock weekly price chart, shares of oil are way oversold and it’s time to buy shares today. That’s not to say USO can’t go lower. Only $0.00 could support that argument, though a well-placed reverse split would prevent that from ever happening — even if we are all driving cars designed by Tesla (NASDAQ:TSLA).
Still, eight straight weeks of lower low candlesticks, an oversold Bollinger Band and stochastics setup and a confirmed doji reversal pattern testing 62% and angular support do have my attention. And as part of a pairs trade with shorting the piping hot coffee purveyor, you may not mind paying up for your next Starbucks coffee or getting gauged at the pump with a bit of extra coin in your pocket.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.