This Bounce Is Making Buyers Wary

Up until recently, coffee chain behemoth Starbucks (SBUX) has had a pretty forgettable year.

It rallied 17% to its peak in early May but then reversed sharply, giving away all of those gains and more.

By the time it bottomed out last month, it was trading down 10% for the year.

Yet earlier this month, SBUX gapped higher off its Q4 earnings beat.

And SBUX traded up around 20% for the month.

Now that momentum is in danger of waning. So let’s check out what’s coming next…

Countertrend Rallies

On the chart below, the 50-day moving average (MA, blue line) shows how SBUX initially rallied into the start of 2023.

But the 50-day MA soon flattened out. And around the middle of the year, it started to slide:

Starbucks (SBUX)

Source: eSignal

That slide began with SBUX’s reversal from its peak (‘A’) on May 1.

That gap lower (a near 10% fall on the day) came despite SBUX announcing that it had substantially beaten Q2 estimates.

This heavy selling sent the relative strength index (RSI) into freefall.

And apart from a brief period in July, SBUX’s downtrend continued with the RSI stuck in the lower half of its band (below the green line).

The 10-day MA also crossed below the 50-day MA. And both MAs bearishly tracked lower.

Throughout SBUX’s prevailing downtrend, though, there were plenty of countertrend moves…

We see that with SBUX’s bounces in June and July and again in August and October.

Take another look:

Starbucks (SBUX)

Source: eSignal

These moves coincided with the RSI rising from near oversold territory (orange circles).

In the first three moves, SBUX was unable to maintain a rally. The RSI failed to gain traction in its upper range too.

Yet in this fourth move, SBUX was finally able to break higher.

This time, the market reacted positively to SBUX’s Q4 earnings beat. That caused it to gap substantially higher.

SBUX has continued to climb since then. It is now trading up around 20% from the start of the month as buyers have scrambled to get on board.

But the strong surge has also put the RSI into overbought territory.

So what am I looking for around here?

Buyers Exhausted

When stocks rally as quickly and strongly as SBUX, new buyers become increasingly wary the longer that rally goes.

They’re worried that profit takers could send the stock lower soon.

This can lead to a sudden downturn in momentum.

And that’s why I’ll be watching the RSI.

The RSI is tracking lower (lower orange line) and diverging from the SBUX stock price (upper orange line). That’s a common reversal pattern.

From here, if the RSI keeps falling, that could soon pull SBUX into a quick reversal.

And that could provide the setup for a potential short trade.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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