Medium term
Trade view / 20 September 2016 at 7:56 GMT

Starbucks stock runs low on caffeine

Trader / TheSteadyTrader.com
United States
Background

Shares of coffee retailer Starbucks are lower by nearly 12% for the year to date and are thus underperforming the broader US indices. On Monday the stock snapped a technical support area which through a multi-week lens could signal further weakness.

From a risk  management perspective, and before looking at the charts, it is worth noting that Wednesday's two central bank meetings (Bank of Japan and Federal Reserve Bank) could cause some market volatility. This is to say that any single stock trades held through these central bank meetings may need to be reduced in size. 

On the longer-term multi-year chart we see that SBUX stock after overshooting its longer-standing channel in 2015 has since mean-reverted back towards the lower end. So far, the bigger picture up-trend continues to hold, although even if the trend ultimately were to hold, an overshooting move to the downside can not be ruled out.

Starbucks
Source: Saxo Bank

On the daily chart note that Monday's selling pressure pushed the stock back below previous horizontal support that had been holding all year. A series of lower highs this year are now arguing for a lower low. Through this lens a logical price target and next bigger picture support would now not come in util the August 2015 lows, although a trade like this needs to be approached in a stair-step way, i.e. more  modest downside price targets need to be set first.

Starbucks
Source: Saxo Bank

Management and risk description

The major risk to this trade in the near term is a broader market rally following Wednesday's central bank meetings. If and when the broader stock markets were to rally on the back of these central bank meetings, then Starbucks shares would likely also bounce.

Parameters

Entry: Sell short the stock or CFD at $53.50 or lower

Stop: Any daily close back above $54.50 

Target: First price target $50

Time horizon: 2–6 weeks

— Edited by Clare MacCarhy

Non-independent investment research disclaimer applies. Read more

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