The beginning of 2022 has not been kind with the global equities. After testing the lifetime highs at the onset of 2022, the global indices have come off close to ~10% from their peak point.
While looking on a YTD basis, the S&P500 (SPX) has turned negative as of now and has returned -7.60% of returns. The corrective moves that have been quite brutal over the past couple of days have seen many stocks undergoing sharp correction. At the same time, it has also presented good opportunities to enter good stocks that have signs of the formation of some base for themselves. It has also grossly underperformed the S&P500 index by returning a negative return of 16.69% on YTD basis.
One such stock is Starbucks Corp. The stock has seen a sharp corrective move during this month; however, the present technical structure shows some possibilities of a short-term bottom in place and some signs of a technical rebound.
SBUX is part of the S&P100 Index and S&P500 Index. When benchmarked against the broader S&P500, the stock has shown a quadrant crossover. It has rolled inside the improving quadrant of the Relative Rotation Graph (RRG). This hints at a potential end to the relative underperformance of this stock.
The chart of SBUX goes on to present clear patterns. After testing a high of 126.10 in 2021, the stock remained under the corrective decline. After coming off until the 101-103 levels, the stock transformed itself in a sideways trajectory and remained in a trading range. This trading range in form of a rectangle kept the stock in a trading range of 108-117 for nearly two months.
The stock could not move out of this formation; following a formation of a bearish engulfing candle near the upper edge of this pattern, the stock witnessed a sharp decline. It violated this rectangle pattern and went on to test the lows of 93.
The most recent price action shows the stock in a fierce attempt to put a short-term bottom in place. It is presently in a congestion zone of 93-98; any move above 98 will cause a sharp technical rebound in the stock.
If one makes a close observation, there are a couple of bullish candles that hint at a potential reversal. In this zone, there are three engulfing candles; all appearing following a decline makes a good case for a technical pullback.
The Relative Strength Index (RSI) is seen making a bullish divergence against the price. While the stock price was making lower bottoms, the RSI made a higher bottom which resulted in a bullish divergence against the price. The MACD is bearish and trades below the signal line; the narrowing Histogram hints at a potential positive crossover in the coming days.
The quadrant crossover; i.e., the stock rolling inside the improving quadrant is likely to put an end to its relative underperformance against the broader markets.
If the present technical structure resolves on the expected lines, a technical pullback may cause the stock to test 109-110 levels. This translates into a potential return of ~11% in the stock. Staying above the 89-93 levels will be crucial for the stock.
Milan Vaishnav, CMT, MSTA,
Member: (CMT Association, USA | CSTA, Canada | STA, UK) | (Research Analyst, SEBI Reg. No. INH000003341)