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Broken Trend and Price Projection: Starbucks


The significance, validity, and price projection of the break.

MINYANVILLE ORIGINAL I'm writing about Starbucks' (SBUX) broken weekly trend today. It pains me to know that the stock has broken its trendline, because I enjoy their beverages immensely, and because the stock has been a relative strength leader. Today I'll be covering the significance, validity, and price projection of the break.

You can see from the first chart that Starbucks has broken its trendline that was in place from the September 2011 lows. The line has three touches of confirmation spaced out at least six months apart. As the length of the trend, the number of confirmations (touches), and the distance between the confirmations increase, so too does the significance of the trend. This is a significant trend we are looking at, based on the above-mentioned measuring criteria. Additionally, the stock has been in a general uptrend since 2009, from a low of ~$7 no less (and still is in a monthly uptrend).

Currently the stock has broken its weekly trendline and is finding support at the $52 level, while experiencing what appears to be a throwback toward the broken line (which often happens). Additionally, there is further support at $50 below the $52 level. The black line at $45 represents my price projection. This projection is derived from taking the distance from the high of the move to the level immediately below it and subtracting the distance. This distance is then added to the level of the break.

The next chart shows the same trend on a daily chart. Notice the throwback and pausing at the averages. On the daily it appears that rather than a trend channel, Starbucks was actually forming a rising (bearish) wedge with a failed upside breakout and subsequent breakdown. It is important to note the distance from the high at ~62 (61.79) to the bottom trendline, which happens to be about 52 (51.64 by me). This is roughly 10 points and our price move calculation.

The next chart is the same trend on a daily chart. I've drawn the trendline from the prior chart (inner thin line) as well as a new trendline with two confirmations that are very close together (signaling weaker line). This trend is assumed to be effect until it isn't. Essentially, if this second trendline holds, then the price projection is null and void. This means it will need to break the minor downtrend drawn from the high, which appears to be forming a minor triangle (with its breakout/breakdown implications). However if it breaks down, our next level of support is $50+

Below is Starbucks on a monthly chart. You can see how long and strong the trend has been here. I have also drawn in the trend channel from the weekly chart. It looks like if Starbucks breaks down the next level of support will be the long-standing trendline, which currently stands at ~$50 for June, but will be rising with each successive month. If and when that line breaks down, it will likely meet the $45 price target.

I would like to add in conclusion that the potential break of the monthly trendline would not mean that the uptrend in Starbucks has ended. It more likely means that the trend has slowed. As a market technician, I know that trends usually begin and form a single steep trendline with little or no reaction, then form a second trendline on an intermediate reaction (less steep slope), and finally form a third trendline at even less of a slope before final capitulation occurs.
No positions in stocks mentioned.
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