Starbucks Corporation (SBUX) stock has dropped nearly 20% since July's all-time high near $100, shaking out a large supply of complacent shareholders, and could reward dip buyers in coming weeks. Even so, adverse relative strength cycles are likely to keep the coffee giant range bound well into 2020, frustrating trend followers and the momentum crowd after a powerful advance that has booked gains in excess of 25% so far in 2019.
The stock broke out above three-year resistance in the fourth quarter of 2018 and has added substantially to those gains, but straight up price action into the third quarter hit overbought technical readings that are now getting worked off through lower prices. Although this process is likely to continue into next year, the decline has reached support at the 200-day exponential moving average (EMA), raising the odds for a high-percentage bounce that retraces the majority of recent losses.
Excellent market timing skills may be needed to benefit from this uptick because the monthly sell cycle in place since August is now accelerating to lower ground. However, the weekly sell cycle hit rock bottom in September and has been glued to the oversold level since that time, favoring a reversal that should fail before reaching the summer high near the triple digits. As a result, trailing stops and an aggressive exit at resistance make perfect sense.
SBUX Long-Term Chart (1992 – 2019)
The company came public at a split-adjusted 34 cents in June 1992 and entered an immediate uptrend that eased into a rising channel in 1995. The rally finally ended at $6.41 in the first quarter of 2001, giving way to a narrow consolidation followed by a 2003 breakout that attracted intense buying interest. The stock carved just a single pullback into the May 2006 high at $19.94 and dropped into a double top pattern that broke to the downside in 2007.
The subsequent decline accelerated during the 2008 economic collapse, dropping the stock to a seven-year low at $3.53 in November. That marked a historic buying opportunity, ahead of a V-shaped bounce that completed a round trip into the 2006 high in 2011. A 2012 breakout added points at a rapid pace, carving a stair-step advance that stalled at $64 in November 2015. That level marked resistance for the next three years, giving way to a rectangular range with support in the low $50s.
The stock gapped above range resistance in November 2108, setting off a wide array of buying signals. The subsequent uptick carved the last two primary waves of an Elliott five-wave advance into July 2019, when the bullish pattern completed within 30 cents of the psychological $100 level. It broke down from a small topping pattern in September and has continued to lose ground through the fourth quarter.
The monthly stochastics oscillator crossed into a sell cycle in August, predicting six to nine months of relative weakness, and is now accelerating through the lower half of the indicator panel. This set-up warns market players to avoid long positions unless taken in hopes of booking an opportune profit. It looks like that moment is getting closer, with the weekly indicator dragging across the oversold level for the past six weeks.
SBUX Short-Term Chart (2016 – 2019)
The Elliott five-wave pattern that started in June 2018 is now complete, favoring an intermediate correction that still hasn't run its course. However, selling pressure may be exhausted for now, setting the stage for a bounce that could test the underside of September's breakdown from a six-week trading range. In turn, that suggests 10 to 15 upside points in a relatively short time frame, generating a favorable buy-the-dip strategy.
The Bottom Line
Starbucks stock is engaged in an intermediate correction but could reward dip buyers willing to sell the stock aggressively at higher prices.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.