Coffee retailer Starbucks (SBUX) at one point this year, just at the downturn point of broader equity indices in April, was up around 34% for the year.  Fast forward 3.5 months and the stock as of today is almost flat for the year and from a technical point of view has broken some important support areas.

Not dissimilar to Apple (AAPL), Starbucks started the year strong right out of the gate.  The stock sports a beta versus the S&P 500 of 0.91, which is why it wasn’t surprising to see the stock falter along with the broader market in the spring.  The stock however did not take part in the summer rally thus far, in fact it has completely gone the other way, further damaging the stock’s technical picture.

After announcing its fiscal third quarter results last Thursday July 26th shares dropped 10% the following day.  The company guided down its outlook for the current quarter as a result of the global slowdown.

From a technical standpoint, as a result of the 10% drop on July 27th the stock broke below an area near $51 which acted as support since mid May.  At the same time the stock also sliced right through its 200 day simple moving average, which until then had done a good job holding as support since April 2009.  The stock now sits above a support area near $45/$46 which was resistance in November and parts of December last year.  In other words, the stock has now given up all of the gains since the broader market rally started in late December.

The weekly chart sheds further light on where the stock currently sits from a longer-term point of view.  For the most part since early 2009 Starbucks stock traded in a nicely upward trending channel.  As investors became overly exuberant about the stock;s and the greater economy’s growth prospects the stock broke up and out of the channel in March, only to now have fallen right back into that multi-year channel.   This phenomena is called ‘return to the mean’ and such mean-reverting moves for the most part are healthy.  The bottom of this up-trending channel coincides with the $45-$46 area of support (past resistance) and as such may be an area to watch closely.

It may well be too early to buy the stock and too late to take part in the higher probability part of the sell-off.  Options players may find opportunity in using sideways trading strategies such as butterflies and calendar spreads while investors and traders in the stock may do well exercising some patience and seeing how the $45 area holds or folds as support.

 

 

 

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