Starbucks Corporation (SBUX) has quietly lifted into Nasdaq 100 leadership, posting much stronger 2019 returns than widely held FAANG members and the vast majority of big tech stocks. The coffee giant broke out above three-year resistance at $64 in November 2018 at the same time that the majority of the market universe was spiraling to multi-month lows, and the stock has steadily built on this resilience in the past nine months, lifting into the upper $90s.
Is it too late to jump on board this moving train, which has booked a 50% return since January, or can investors join the party and still sleep at night without fear of the inevitable downturn? After all, buying high and selling higher makes perfect sense at times, but will it work in this instance, especially with geopolitical headwinds ramping up as we head toward the often volatile fourth quarter?
The first warning that now might not be the best time to buy is hidden in the latest closing price. The stock ended the session on Friday, Aug. 9, at $96.30 after posting an all-time high at $99.72 on July 26. When you get a chance, pull up a list of equities that are trading well above $100 for the first time and notice how many rallied into this psychological level and then stalled or reversed a few points above or below the magic number. This is typical market behavior for several reasons.
First, analysts usually set price targets at round numbers in a self-fulfilling prophecy that fuels uptrends. However, they also take a second or third look when targets are hit, often changing course in cautious commentary that stokes selling pressure. Illustrating this point, JPMorgan removed Starbucks stock from its Analyst Focus List "on valuation" just three days after the all-time high was booked 28 cents under 100.
Second, technicians view big round numbers as natural resistance zones in uptrends, where one set of owners pulls up stakes, leaving a vacuum that needs to be filled with new shareholders who don't mind holding at lofty levels. Market psychology is also at work when a rally lifts into $100 from the $80s or low $90s because traders and investors transition into protection mode, nervous that other winners will beat them out the exit door.
Price Targets Reached
Fibonacci extensions provide another reason to think twice about buying the stock right now. It's perfectly normal for average breakouts to reach price targets at the 1.618 or 2.000 extensions before entering intermediate corrections, while market leaders can often stretch the upside into the 2.618 extension. Starbucks just hit the 3.000 extension, highlighting enormous relative strength while warning that the uptrend is extremely overbought.
The monthly stochastics oscillator is also useful for gauging the longevity of an uptrend or downtrend. Bullish and bearish crossovers generally predict six to nine months of relative strength or weakness, depending on the underlying trend. The stock entered a buy cycle in October 2017 that has now stretched across 22 months, adding to overbought readings that predict the start of a multi-month correction.
The length of time spent at overbought levels provides additional input, with prior analogs often acting as fractals for current price action. Looking back at the past decade, the stock held overbought readings for about one year in two instances while averaging about 10 months. The current instance crossed into that zone 10 months ago in October 2018, so it has now entered a high-odds reversal period that stretches into the first anniversary just seven weeks from now.
The Bottom Line
Starbucks stock has lifted an amazing 50% so far in 2019, but dark technical clouds are gathering, raising the odds for an intermediate correction that tests much lower price levels.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.