SBUX: Bull signal on earnings

Update 8/15/2013: SBUX crossed below its 10-day price channel, signalling that its position should be closed. The position was structured as short vertical spreads expiring in September, and often in such cases I've kept positions open in the expectation of a reversal. 

However, given the generally bearish bias of the markets and the fact that SBUX gapped down this morning and then continued to fall, I've decided to take my loss early rather than seeking to mitigate.

The stock fell by 4.2% during the 13 days the position was open. The options produced a negative yield on risk of 18%.

Update 8/2/2013: SBUX finally broke above its post-earnings 20-day price channel, allowing me to open a position. I structured it as vertical options spreads sold for credit and expiring in
September, short the $72.50 puts and long the $70 puts. 

The position has at expiration a 3% cushion of profitability below the entry price and a 22.8% maximum profit at expiration.

Starbucks Corp. (SBUX) broke above its 20-day price channel on Friday, the first trading day after the company announced earnings that beat expectations by 3%.

SBUX 2 years 2-day bars

Under my rules for breakouts following earnings announcements, SBUX will need to trade above Friday's high to confirm the breakout. The confirmation level is above $73.52.

I held SBUX for several options periods through July. The combination of no momentum combined with the 30-day earnings announcement exclusion required by my rules made it impossible to roll my position into the August options.

The stock price dropped below its 10-day price channel on July 24, giving a signal to abandon my efforts to roll the position and to instead calculate my profits, which I did here.

I assess the present uptrend as running from the beginning of August 2012. The Elliott wave count can be seen on the weekly chart as three waves, with the earnings breakout a continuation of the upward momentum, or as four waves, with the breakout constituting a fifth wave up.

I favor the three-wave interpretation because the decline before the earnings announcement is relatively shallow. It just doesn't have the look of a fourth wave at this magnitude of charting.

Friday's  breakout was the fifth to the upside since the start of August 2012. Three of the five completed trades was profitable, for an average yield of 5.4% over 55 days. The two unprofitable trades lost 1.6% over 12 days. The win/lose yield spread is 3.8%.

Starbucks next publishes earnings on Oct. 31. The stock goes ex-dividend in August for a quarterly payout yielding 1.l5% annualized at current prices.

Decision for my account: I intend to open a bull position in SBUX if it trades persistently above $73.52 on Monday. I'll structure it as short vertical options spreads.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

Disclaimer

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.