Sell Signal in Starbucks SBUX Weekly and Daily View

Aug 24, 2010: 9:44 AM CST

Ouch – Starbucks (SBUX) shares shattered confluence support this morning, both on the weekly and daily frames.  Will the sell-off materialize that this support break suggests?

Let’s take a look first at the Weekly frame:

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 snap-back retracement/fall that they negative divergences forecast (hinted).  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 snap-back 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 snap-back from the highs.  Not anymore.

So, the weekly chart suggests that – in the short term – shares could continue their fall to test the 200w 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 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.

Like the S&P 500, Starbucks (SBUX) appears to be forming a head and shoulders pattern, though it’s not perfect (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 200d SMA at the $24.00 per share level.

Yesterday saw a 50 cent decline and today it looks like share are falling about a dollar – that’s near 4% (as of mid-day 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 look-out for the 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.

Corey Rosenbloom, CMT
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