Trade of the Day: Starbucks Stock Could Fall Further

SBUX stock is poised for more downside following its earnings report

Starbucks (NASDAQ:SBUX) reported its latest batch of earnings after the close of trading on Jan. 28. The report was a mixed picture versus analyst expectations and in early trading SBUX stock is pointing lower. On the charts, the stock flashed a bearish reversal in recent days, which now looks to continue following the earnings report.

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Despite the well-known risks of putting on ‘trades’ ahead of a company’s earnings report, each earnings season I get amazed all over again at how many traders seem to be willing to take these low probability trades.

Much better probability trades tend to set up following any given company’s earnings report. To wit, shares of Starbucks are on my radar today.

Before digging into the charts, I consider Starbucks with its global presence to be a decent indicator of economic strength and consumer behavior. Thus, this is an important stock to watch.

SBUX Stock Charts

Source: TradingView

Starting off with the multi-year weekly chart we see that SBUX stock accelerated higher in a meaningful way out of its summer 2018 lows. Within a few months, the stock caught good momentum and was on the trend-following crowd. The trend is your friend, as we all know, until it ends.

Finally, in July 2019 following its earnings report, SBUX stock gapped higher one more time and by so doing took its chart into vertical overshooting mode. This ended up marking the high for the stock (for the time being) as the stock then also reached the very upper end of its trend (purple lines).

Trend momentum as measured by the RSI also peaked at that point and a sharp mean-reversion move took hold in the stock. Starbucks stock then rebounded along with the broader market in Q4 2020, until a few trading sessions ago a potentially lower high was put in and the stock reversed lower due to headlines surrounding the tragic coronavirus.

The stock now sits at a critical juncture and any further weakness could break a technical pattern.

Source: TradingView

On the daily chart we see all of this more closely. Note how the top in July 2019 came on an up-gap and how the stock a couple of days ago on Jan. 27 gapped down. As a result it may now have formed a lower high versus those summer 2019 highs.

The stock currently sits at crucial support in the $86 – $88 area, which also coincides with its 50-, 100- and 200-day simple moving averages as well as the support line on the above big picture chart.

I think the stock could soon break below this support area and fall toward the low $80s. Any strong bullish reversal, particularly one that begins to fill the Jan. 27 down-gap would be a stop loss trigger.

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