Tuesday, January 25, 2011

SBUX Watch

The coffee company Starbucks Corp. (SBUX) has broken through the 55-day upper price channel with a rising adx, providing an entry signal on the bull side. SBUX announces earnings on Wednesday after the close, so it will be case of immense gratification or gross disappointment, almost instantly.

phase pfeppstrend

SBUX has been in confirmed bull phase on the pfe/pps chart since Jan. 20.

The price channel signal came the next day, Jan. 21, but with the caveat that if the next two trading days both closed below the price channel entry day, then the any positions must be exited. This is called the "rejection rule".

On Monday SBUX closed above the channel, so the rejection rule is no longer in play, and the stop-loss is set at 5¢ below the breakout day low, at $33.01.

SBUX has excellent financials (as well as OK coffee), with a return on equity of 28% and debt equal to only one-tenth of equity. Institutional ownership stands at 74%.

Starbucks is trading slightly above a range that has held sway since early December, with today's high moving above the prior swing high set on Jan. 3. The last significant swing low was on Oct. 27.

Reversal Levels
  • $33.78, +1.5% (today's high)
  • $33.42, +0.4% (prior swing high)
  • $33.29 --- You are here.
  • $32.69, -1.8% (20-day moving average)
  • $32.13, -3.5% (50-day moving average)
  • $28.02, -15.8% (swing low)

On the slow-trading chart, SBUX has been on a rise since November 2008, switching once into a brief bear phase during that period. The current bull phase began last October.

Monthly chart
phase pfeppstrend

The gorilla in the room is the SBUX earnings announcement tomorrow. SBUX has produced earnings surprises in four out of the last five quarters, so it is in the position of being prone to
happy surprises.

The company has grown return on equity every year for the past decade, and sales for nine out of the past 10 years.

So, I would be unsurprised by an upside surprise, and the technicals on the price-channel chart suggest that traders will respond by bidding up the price. That, at least, is my current bias.

My present practice for taking positions based on the price-channel analysis is to leg in: Begin with a vertical spread as a way of limiting loss, and then add to that position as the price action confirms the analysis.

My position on SBUX is a bull put spread expiring in February, short the $33 strike put and long the $31 strike put, for a credit of $58 per contract.

Table Abbreviations:
  • pfe - Location of the polarized fractal efficiency line.
  • pps - Person's Proprietary Signal mode.
  • trend - Trend of the polarized fractal efficiency line.

Key to the PPS/PFE tables
phase bull phase
bear phase
pfe +100 and above
+50 to below 100
0 to below +50
below 0 to above -50
-50 to above -100
below -100
pps bull confirmation
bear confirmation
trend uptrend
no trend

More on the PFE/PPS analysis

Read a detailed explanation of the analytical tools and how they’re used, including trading rules.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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