The Fall of Starbucks – SBUX in Three Timeframes

Jul 5, 2008: 10:57 AM CST

How could the stock of such a well-known company as Starbucks (SBUX) plunge so dramatically in such a short time? Let’s look at the charts to see clues and potentially profitable zones we could have seen on the charts.

Starbucks Monthly:

The structure of the weekly chart shows a very interesting pattern.  The stock languished roughly through 1999 – 2003 before breaking strongly up from a lengthy consolidation base (one could even say ascending triangle pattern).

Price surged to the upside for many consecutive months in a row before forming a temporary ‘euphoric’ or climax top and pulling back to the 20 period monthly moving average to form a sort of bull flag pattern.

In late 2005, price broke upwards out of the retracement and made new highs at $40 per share, again showing large advances before pulling back to the 20 period EMA and inflecting back up.

The key structural change came in late 2006, when price made a “Failure Test” (failed to break to new highs after a valid ‘buy’ signal) and formed a “Double Top” at the $40 level.  Also, there were negative momentum divergences (not shown) at this level.

Price then declined quickly to retest the 20 period EMA, but failed (broke through) this level, setting up a potential test of the 50 period EMA (a sign of a weakening trend – red arrow).  Price did support at the flattening 50 period EMA, though when price broke solidly through this level, all bullish bets were off on this stock and there was no longer any theoretical ‘support’.

At this point, volume began to surge to the downside as funds and investors indiscriminately sold shares as fundamental prospects for the company dimmed.  Late 2007 to present has seen only one up-month in the price, which was quickly erased.

Starbucks Weekly:

The weekly chart zooms us in a little closer on the more recent price action, and clues us in to a few more ‘flag’ trades and momentum divergences.

The early 2006 bull flag is a classic pattern to study for educational purposes, as is the subsequent bear flag in April 2006.

The failure test of the $40 per share level looks clearer on this cart, and price has scarcely made any progress to the upside, only to retrace back to the falling 20 week EMA, which set-up key ‘short selling’ entries (trades).  From early 2007 to present, price has failed to breach the 20 week EMA with any confidence.

Before you rush out and get too bearish on the stock and start shorting indiscriminately, notice that there’s a rounded bottom forming (more clearly on the daily chart) and a lengthy positive momentum divergence forming.

Volume has absolutely surged to record levels in 2008 (and the end of 2007) as Starbucks has been aggressively distributed.

Finally, the Daily Chart:

You can almost ‘feel’ the momentum shifting from bear to neutral in this chart, as sellers may have used all their power.  Perhaps funds are seeing this stock as fundamentally attractive at these prices, and so potential accumulation is taking place, but that will be clear after the fact.

Price could be forming a ‘Double Bottom” pattern on the daily chart, and could be building a potential base to test monthly and weekly overhead resistance (via the moving averages) at $22 to $24 per share.  Notice that the daily chart would have the 200 period moving average to overcome as its primary resistance, but if bulls can muster a ‘higher high’ at the $19 per share level, we could see a potential trend reversal back up on the daily chart.

Nevertheless, the daily chart shows a wonderful example of a pure downtrend, where the moving average orientation is ideal (20 below the 50, which is below the 200) and price fails to retrace above the falling 50 period EMA (which is an ideal place to select or trail a stop-loss order).

Whether you plan to trade Starbucks or not, the stock serves as an excellent example of chart analysis, trend analysis, and also why you should never hold a stock because “you see the company on every street-corner” or “I see people shop there everyday” or “Everyone knows about the company so the stock can’t go down” or some logic like that.

Prices, even of very well-known companies, can fall and continue falling beyond what your trading/investing account can handle.

Always watch the higher time frame structure to see if there are clues or trends that will help you make more informed decisions on your chosen timeframe of trading activity.

Visit and join the Market Club for more analysis and “trade triangle” signals for Starbucks and any of the stocks you’re watching or trading.

1 Comment

One Response to “The Fall of Starbucks – SBUX in Three Timeframes”

  1. Anonymous Says:

    A quick note to let you know how much I enjoy your blog.

    Paul
    http://www.themarketspeculator.blogspot.com