Sell Signal for Starbucks (SBUX)

08/25/2010 12:01 am EST


Corey Rosenbloom

Founder and President, Afraid to Trade

Ouch! Starbucks Corp. (SBUX) shares shattered confluence support Tuesday morning, both on the weekly and daily time frames. Will the selloff materialize as this support break suggests?

Let’s take a look first at the weekly time frame:

Click to Enlarge

First things first, there was a persistent negative momentum and volume divergence (lower indicators) that undercut (failed to confirm) the recent push to new recovery highs at the $28.00-per-share level.

We are now seeing the expected snapback retracement/fall that the negative divergences forecast. So far, price is behaving in line with classic principles of price movement.

Price sliced through the rising 20-week EMA—something it had not done since breaking above it in July 2009— which was an initial “take profits if long” signal on the two snapback bars in June 2010.

From there, price tested the rising 50-week EMA at the $23 level and is now trading beneath that critical support level on this morning’s breakdown.

Price also broke the 23.6% (lesser known) Fibonacci retracement support at $23.40. Notice how it held as support on the snapback from the highs. Not anymore!

So, the weekly chart suggests that—in the short term—shares could continue their fall to test the 200-week SMA at the $21.12 price or the 38.2% large-scale Fibonacci retracement at $20.25.

Any breakdown under the $20-per-share level would suggest that a larger decline was at work, which would target the $18 level over time.

Of course, this all is suggested by the chart and is by no means a guaranteed move—that’s a standard disclaimer.

Let’s now drop to the daily frame to see the structure and breakdown there.

Click to Enlarge

Like the S&P 500, SBUX appears to be forming a head-and-shoulders pattern, though it’s not perfect (and neither is the pattern in the S&P 500). Take that with a grain of salt.

More importantly, price has broken its uptrend (with a series of lower lows and lower highs, reversing the short-term trend) and sliced under daily EMA support on all levels.

Not only is price beneath the 20- and 50-day EMAs, it recently cracked under (shattered is probably a better word) the important 200-day SMA at the $24.00 per share level.

Yesterday saw a 50-cent decline, and today it looks like shares are falling by about a dollar. That’s nearly 4% (as of mid-day on Tuesday).

Not only did price break the 200 SMA, but also the $24 level price support and the $23.50 low from July.

Taken together, the chart odds favor further downside price action to come; unless we see a sudden resurgence in price that takes shares back above $24 (at which point many short sellers would likely stop out).

Barring that, be on the lookout for potential for shares to decline further, and with no known support above on the daily chart, turn to the weekly frame for levels (targets) to watch.

By Corey Rosenbloom, trader and blogger,

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