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The Starbucks Rally Was Born to Die — Short It!

Tyler Craig

The inevitable and long-awaited bounce in beaten-down Starbucks Corporation (NASDAQ:SBUX) shares is upon us. But it’s a rebound that I suspect will have a short shelf-life. And I have a myriad of convincing reasons. Today, I’ll flesh them out and provide a trade idea for capitalizing on continued and anticipated SBUX stock weakness.

Last month’s breakdown in Starbucks was an epic event.

Three years of indecision were finally brought to a head as the stock broke decisively out of its trading range. Unfortunately for shareholders, the breach took out the southern, not northern, border. The ensuing free fall ushered SBUX to its lowest levels since August 2015. And the plunge was deep enough to slam the RSI to its lowest reading in a decade.

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Source: OptionsAnalytix

With the stock now sitting in a daily and weekly downtrend, all rallies are suspect. The falling 20-day, 50-day, and 200-day moving averages are confirming the bears’ dominance and provide further reason for caution. And here’s another feather in bears’ cap: the broken horizontal support level at $52.50 is bound to turn into resistance on any future retests due to the length of its reign and the number of times it halted declines.

There are two ways to view the current stock snap-back. You either wager SBUX stock is going to ramp back to $58 and form a “V” bottom in the process, or you bet this bounce rolls over. Personally, I’m going with the latter. It’s the higher probability outcome in situations such as this.

SBUX Stock Bear Calls

In sizing up how to position for the stock’s inability to rise much further in the coming weeks, I like selling bear call spreads. Think of it as a strategy that gets you bearish into strength, thus preparing you to profit during the next decline.

Sell the Aug $52.50/$55 bear call for 40 cents. The potential reward is limited to the initial 40 cent credit and will be captured if Starbucks sits below $52.50 at expiration. The risk and maximum loss is $2.10.

To further increase your odds of success, consider scaling-in. Enter half now at the 40 cent credit, and half later if SBUX rises enough to lift the spread credit to 60 cents.

As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.

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