Starbucks (SBUX) has continued its impressive post-earnings push higher.
Although some may not view it as huge, SBUX shares have climbed more than 6% since the company reported results, doing so in a slow, consistent fashion rather than a huge gap higher. That's not to say we didn't have a small gap, but at only 3.5% and with wide post-earnings action, there is no gap left on the charts for Starbucks. This alleviates the "every gap needs to be filled" trading thesis some investors swear by.
Where do the shares head next is the question on many investors' minds.
While short-term charts are overbought, my focus is on the potential setup of the weekly chart. Starbucks spent nearly six months climbing out of the disastrous hole created at the start of the summer of 2018.
The overall market pullback in December 2018 did not spare Starbucks. And despite tensions between the U.S. and China, business for the coffee brewer showed better in both countries than expected.
Starbucks is a tough buy today, but certainly not a short. The pattern worth watching here is one of potential, not one yet formed.
The stock has all the makings of a cup-and-handle pattern (see below), but requires a few weeks of sideways trading action.
The $67.50 to $70.50 range is the area we are watching. If Starbucks shares trade in this range for another two to three weeks without a significant intra-week move outside of this range, then the pattern will be complete. At that point, Starbucks becomes a strong momentum buy on a weekly close above $70.50. The upside target becomes $76.50 to $78.50 over the next four to six weeks.
Should the handle portion (the sideways trading action) form, but Starbucks closes below $67.50 a few weeks from now, then traders should anticipate the stock will trend lower. I would estimate a range of $60 to $65.50 would develop heading into the summer months.
The action favors the bulls and I can understand trading a close above $70.50 during the week, but the optimal risk-reward is to be patient and let the pattern form rather than hoping it will.