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Starbucks: Peaks And Troughs In Trends

07/28/00 11:56:22 AM
by David Penn

Last time, we took a look at the growing horizontal formation for Starbucks [SBUX] through June 2000 and into the first half of July. The present review of the stock's primary and intermediate trends suggests that Starbucks may test recent highs of 45 1/4 in August.

Security:   SBUX
Position:   N/A

Primary trends last from one to three years, and are made up of a number of smaller, secondary trends: intermediate trends, which last from three weeks up to six months or more; and short-term or minor trends, which can run from several days up to a month. Primary trends generally reflect the market's opinion of a company's fundamentals. As such, they are an effective barometer of the overall market climate in which intermediate and short-term moves occur. When a primary trend is bullish, intermediate trends on the bull side are more likely to be of greater significance than intermediate bear trends. Similarly, when a primary trend is bearish, intermediate trends on the bear side are likely to be of greater magnitude than are those on the bullish side.

Over the past year, SBUX has reached steadily higher peaks and steadily more shallow troughs--part of the overall bullish direction for the stock's primary, or major, trend. For background, Starbucks rallied from a low of 15 in October 1998 to reach 27 1/2 by year's end. SBUX continued climbing to a high of 41 by May 1999, and congestion in this area continued until a major sell-off early in July 1999. Even major is an understatement; volume on SBUX reached 73 million shares on July 1, almost 27 times the average trading volume of the stock. Nevertheless, SBUX remained above its October 1998 low of 15 and established an area of support (the lowest "floor" on declining prices), at around $20 by August 1999.

Graphic provided by: Window.
 
Starbucks oscillated between 20 and 30 over the next six months, setting an intermediate point of resistance at 31 in November 1999, which it then proceeded to break in February 2000. A point of resistance marks the highest point of a rally, and when prices advance beyond this point--particularly when accompanied by above-average volumes--it is considered bullish. True to form, SBUX advanced to set a new point of resistance at 45 ten weeks later in April. Reaction to this climb was a sell-off which took SBUX down more than 15 points by May 2000. Yet again, SBUX remained above previous lows from the summers of 1998 and 1999. A selling climax later in May triggered a resumption of the climb, as SBUX reached 40 by mid-July 2000.

Starbucks spent all of May 2000 (and most of April and June, as well) trading below its 50-day simple moving average (SMA). A volume spike of 36.9 million shares (13 times average trading volume) on June 7 coincided with SBUX crossing its 50-day SMA line. For most of July, SBUX advanced gradually, avoiding a collision with its line of support. A line of support consists of a trendline drawn at an advancing angle in a bull market, connecting the lowest points of two or more successive reactions. Crossing this line on the downside tends to suggest that a bearish, short-term correction may be in the making. During trading on July 25, SBUX opened just above its line of support and closed just below. The following day, Starbucks traded in a very narrow range, also just under its line of support, on average volume of 2.5 million shares.

While Starbucks is bullish in both its primary and intermediate trends, stocks in general have a tendency to buck at crossing boundaries as significant as lines of support, often advancing and retreating until either sufficient demand forces prices higher or profit-taking sends the price sliding back down the mountainside. Starbucks' downside crossing of its line of support is noteworthy, but watching to see how SBUX reacts now that its line of support has become a line of resistance--marking off upside progress--could prove to be rewarding for patient investors.



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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