The Coffee War Heats Up

02/17/2011 10:10 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

Both Green Mountain Coffee Roasters (GMCR) and Starbucks Corporation (SBUX) have been in the headlines this week with prices in GMCR especially volatile. First there were partnership rumors and then Starbucks signed a deal to provide its coffee to high-end hotels serviced by Courtesy Products, which has it’s own single-serve coffee delivery system. Of course, Green Mountain leads this space with its widely popular Keurig brand. Are there any signs from the charts that either company is attractive at current levels?

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Chart Analysis: GMCR broke out of its trading range on February 3 after beating earnings estimates. The stock has been a favorite target of some bears as the short-interest ratio was recently around 12. The shorts were really squeezed on Valentines Day, and single-stock circuit breakers were tripped when GMCR was up 14% in five minutes.

  • The breakout from the upward-sloping trading range (lines a and b) has upside targets in the $50-$52 area

  • A weekly close at the lower end of the week’s range would leave a long shadow on the candle formation, which is typically negative

  • This week’s high at $47.81 will be tough to overcome

  • There is first support at $41.50 with more important support in the $38.50-$40 area

  • The weekly on-balance volume (OBV) is lagging the price action as it has failed to stage an impressive breakout. This is in contrast to the strong action of the OBV in late 2009 and early 2010

SBUX developed a classic bottom formation in early 2009 and has been a market leader for most of the past two years. SBUX is now testing the upper boundaries of its recent trading range.

  • A strong weekly close above the recent highs at $37.78 on better-than-average volume would be positive and project a move to the upper trading channel (line c) in the $35 area

  • SBUX has failed on two attempts to move above $37.78 and the volume was very heavy on the late-January decline

  • There is short-term support now at $32-$32.50

  • A break below the January lows at $30.75 would allow for a test of the weekly uptrend currently at $26.80, line d

  • The weekly OBV is positive, but it does show some loss of upside momentum

What It Means: Though I would not expect this week’s high in GMCR to be overcome for a while, those selling this stock short must be using fundamentals, not technical analysis, as the major uptrend is clearly intact. Nevertheless, the wide range in GMCR makes the risk high for new positions. The weekly chart of SBUX is much stronger than that of GMCR, suggesting Starbucks will be an able competitor for Green Mountain in the single-serve coffee space.

How to Profit: Most successful traders know that taking no position is often a good strategy because overtrading can typically hurt performance. Though I am sure the volatility in both stocks makes the option premiums rich enough for some direction- neutral option strategies, this is outside my area of expertise and I’ll recommend no position as a result.
 
Both GMCR and SBUX are good candidates for long-term growth portfolios, but to me, they only look attractive at significantly lower levels where the risk can be better controlled. For example, GMCR would look much more interesting if it pulled back into the $38.50-$40 area, and SBUX would seem more appealing in the $29.80-$31.00 area.

Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.

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