Shares of Starbucks Corporation (NASDAQ:) are higher by about 30% year-to-date and the latest rally has once again taken SBUX stock into overbought territory. At this point, active investors and traders could look to fade (short) the stock for a trade.
But before we dive into today’s trade, let’s consider a few important factors.
Over the past 21 years as a professional trader and investor I have found that one of the best things about being a trader is also a major reason why many market participants fail to make money. That “thing” is the freedom to work/trade when and from wherever one pleases. This freedom often leads traders to make bad money management decisions.
In other words, it is imperative to set a specific rule set to abide by.
If we translate this into chart analysis, it is important to find trades with well-defined and optically obvious “levels” where one takes a profit or is stopped out. A great example of a chart with well-defined stops and profit targets is that of Starbucks stock.
SBUX Stock Charts
On the multi-year weekly chart we see that the longer-term up-trend has largely taken place in a well-defined channel. Also note that because of the sharp YTD rally, SBUX has once again reached the upper end of the channel.
At the bottom of the chart, the weekly MACD momentum oscillator is now overbought at record levels. Based on these two parameters alone, SBUX stock is now likely capped on the upside for the time being.
On the daily chart we see that Starbucks stock has also worked higher in an even steeper channel since summer 2018. Here too the upper and lower ends of the range are clearly defined and the stock recently arrived at the very upper end.
The last time Starbucks stock rallied to the upper end of this range in November 2018, it ultimately retraced all the way back to the lower end. Furthermore, the recent multi-day rally has taken a vertical line, just like the rally into the November 2018 highs did.
Ultimately, charts that take their steep slopes to vertical or parabolic moves most often end up retracing at least part of the steep rally.
In my eye this now sets SBUX stock up for a short around the $82.50 – $84 area. The next downside target is $78 and any further significant up-day from here is a stop loss signal.
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