Dunkin’ Brands Group Inc. (DNKN) has acted better than Starbucks Corp. (SBUX) so far in 2017, lifting off a month-long basing pattern into a test of the 2015 bull market high while its west coast rival struggles at a 2-month low. However, a quick look under the technical hood reveals more similarities than differences, with neither coffeehouse in a strong technical position to sustain a new uptrend.

DNKN has served java for decades but just came public in 2011, nearly 20-years after SBUX’s historic 1992 IPO. The Seattle brewmaster has rewarded shareholders with two powerful uptrends over the years while Massachusetts-based DNKN topped out in 2014, less than two years after its IPO, and has gone nowhere since that time. So, given their opposing fortunes, which of these stocks now offers a better buying opportunity?

Dunkin' Weekly Chart (2012–2017)

DNKN

A well-received August 2012 public offering bought DNKN to life, yielding an uptrend that eased into a rising channel at the start of 2013. It continued to add points into March 2014 when it topped out at $53.02 and sold off in two brisk waves that reached a 52-week low at $40.50. That decline established range support, ahead of a June 2015 breakout that added less than four points before rolling over in August.

The failed breakout reinforced resistance in the low-50s, ahead of a breakdown through 2014 support in October. Selling pressure continued into the first quarter of 2016, reaching a 3-year low in the mid-30s, while the subsequent recovery took 11-months to complete a 100% round trip into the 2015 high. The stock has been consolidating at that level for the last two months and could break out in coming weeks.

Two technical factors add considerable risk to positions taken in reaction to a breakout above range resistance (red line). First, 3-year price action has carved a broadening formation aka megaphone pattern that exposes a steep decline into the 30s. Second and more importantly, On Balance Volume (OBV) topped out in 2014 and took a deep dive into 2016 while the recovery wave has failed to attract substantial buying interest, signaling a major bearish divergence that signals inadequate institutional sponsorship.

Starbucks Weekly Chart (2011–2017)

SBUX

A breakout above 2007 resistance in 2011 generated a strong uptrend that stair-stepped in three waves into the October 2015 all-time high at $64, ahead of an intermediate correction that posted lower lows into the fourth quarter of 2016. The stock rallied into the trendline of lower highs in November, but aggressive sellers triggered December and January 2017 reversals, adding to the long string of aborted recovery efforts. A bearish reaction to fourth-quarter earnings two weeks ago completed the failed test at resistance, triggering a high volume selloff

A Fibonacci grid stretched across price action since the August 2015 mini flash crash organizes the correction, highlighting the late 2016 descent into the 50% retracement level. Meanwhile, the downtrend has taken the shape of a bull flag pattern that now exposes a sub-50 reading where the rising 200-week EMA could finally attract committed buyers. Even so, that test could be weeks or months away, telling sidelined players to keep their power dry for now.

On Balance Volume (OBV) looks extremely bearish, topping out with rising price in late 2015 and entering a distribution wave that continues to post lower lows as we head into the first quarter of 2017 This bearish trend tells us the intermediate correction hasn’t ended yet while raising odds the stock will continue to lose ground and head into deeper support in the upper-40s.

The Bottom Line

Dunkin’ Brands is testing the 2015 high and could break out while Starbucks continues to underperform broad benchmarks, stuck in a multiyear correction that could post new lows in coming months. This tells us DNKN offers a better buy right now, but tight stops will be needed to control risk because technical headwinds could undermine the new uptrend.

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

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