Starbucks Trying To Perk

01/31/06 11:04:36 AM

by Arthur Hill

Starbucks broke above flag resistance, but low volume suggests that this breakout may lack caffeine.

Security: SBUX
Position: Hold

Starbucks (SBUX) surged in October/November 2005 and then consolidated in December 2005/January 2006 (Figure 1). The consolidation declined slightly and looks like a bullish flag. A move above the upper trendline and flag highs would signal a continuation higher and reinforce support at 30. Based on a flag flying at half mast, the upside target would be to around 40 (33 - 23 = 10 and 30 + 10 = 40).

Even though prices are perking up and breaking out, volume is uninspiring and casts a shadow on the breakout. Volume provides the fuel for a breakout and expanding volume would validate a breakout. However, volume was below average over the last six days, sewing the seeds of doubt.

FIGURE 1: STARBUCKS. SBUX surged toward the end of 2005 and then consolidated at the end, coming into 2006, forming a bullish flag.

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

As a backup, I also applied the accumulation-distribution line and on-balance volume indicators. These volume-based indicators can be used to either confirm or refute my doubts. The accumulation-distribution line (green) completely fell apart in December and remains near its lows as of late January. This indicator shows some serious selling pressure within the consolidation and has yet to bounce. On-balance volume (blue) declined over the last two months, but not nearly as much as the accumulation-distribution line, and this shows lighter selling pressure. However, OBV did not break above its early January high and is lagging the stock. This confirms the low-volume advance over the last few days.

While the price chart breakout looks bullish, volume indicators are not confirming, and this causes me to hesitate. There is still a lot of resistance around 32 and I would like to see a move above 33 on good volume before turning bullish on this breakout.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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