Starbucks Stock Could Reward Aggressive Short Sales

Starbucks Corporation (SBUX) shares broke long-term support in June after the company lowered 2018 guidance in response to weaker-than-expected same-store sales. Some analysts blamed the shortfall on May's racial incident in Philadelphia, while others wondered if intense competition is finally taking its toll on the international coffee king. In either case, the decline has set up a potential short sale opportunity that could generate healthy profits into the fourth quarter. 

The company outlined three strategic initiatives to get back on track: returning $25 billion in cash to shareholders through buybacks and dividends, scaling back new store expansion, and closing underperforming urban operations. This should all sound familiar because it's the typical playbook when growth at a major brand starts to decelerate due to maturation, saturation and/or competition. (See also: Starbucks Stock May Fall 12% as Outlook Worsens.)

The stock entered a strong uptrend after coming pubic at a split-adjusted 34 cents in June 1992, topping out at $2.52 in 1996. It broke out of a sideways pattern in 1998, generating high volatility and broad price swings into the February 2001 top at $6.41.  An ascending triangle pattern into the second half of 2003 yielded another breakout, setting the stage for impressive gains during the mid-decade bull market.

Buying interest fizzled out near $20 in 2006, triggering a pullback and failed breakout attempt that completed a double top, ahead of a June 2007 breakdown and downtrend. Selling pressure accelerated during the 2008 economic collapse, easing in November after the decline tested support at the 2001 low above $3.00. The subsequent recovery wave took nearly three years to complete a round trip into the prior high.

A 2011 breakout attracted a strong momentum bid, generating a powerful trend advance that continued into October 2015, when the stock topped out at $64. It sold off in multiple waves into the 2016 election and turned higher, testing the prior high in June 2017. A breakout failed less than one point above that level, trapping buyers in a downturn that tested the 2016 low in August. A bounce into January 2018 failed well below range resistance, while June's bearish catalyst broke 2016 and 2017 support.

The monthly stochastics oscillator dropped into the oversold level in the fourth quarter of 2017 and crossed into a buy cycle that failed in February 2017. The subsequent sell cycle still hasn't reached the oversold level, raising the odds for weakness that could continue into year end. Meanwhile, the decline has cut through 50-month exponential moving average (EMA) support for the first time since 2009, signaling extreme weakness.

Price action between 2015 and 2018 carved a bowl-shaped pattern with support in the lower $50s and resistance near $64. The June decline broke the trendline of higher lows, hitting a two-year low at $47.37 before bouncing into July. It is still trading below the broken August 2017 and February 2018 lows, setting up barriers at $52.50, $53.50 and at the trendline near $55. The weekly stochastics oscillator has now dropped to the oversold level, suggesting that the current pullback will reach one or all of those targets before rolling over and resuming the downtrend.

The February low aligns with the .50 retracement of the March into June selling wave, while the bearish breakaway gap aligns with the .618 retracement. The trendline is slowly rising into that level, signaling a low-risk short sale opportunity at $54 and $55.50. Even so, the next downturn could start at a lower resistance level, so prospective short sellers should focus on short-term price action, looking for a major reversal in the 60-minute time frame. (For more, see: Starbucks to Close 150 Underperforming Stores, Hike Dividend.)

Starbucks stock broke down in June and is now pulling back to test new resistance. This marks a classic short sale setup, with potential downside into the bottom of the August 2015 mini flash crash bar at $42. (For additional reading, check out: How Starbucks Makes Money.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>