Starbucks Stock Must Negate This Bearish Pattern To See Further Upside

Starbucks Corporation SBUX gapped down Sept. 15 in sympathy with Yum China Holdings, Inc YUMC after it provided a business update and in it announced a negative impact from the COVID-19 Delta variant. Yum China forecasts its profits could be reduced by 50% to 60% for the third quarter due to lockdowns in a number of Chinese provinces.

On Monday Stifel maintained its Buy rating on Starbucks but lowered its price target to $130. If Starbucks were to reach the target price, it would still be a new all-time high for the stock.

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The Starbucks Chart: This week Starbucks has been working to erase some of the 8% decline the stock took between Sept. 10 and Sept. 20. On Wednesday Starbucks was attempting to break up over a resistance level at $113.45, but rejected and wicked from the area.

The decline paired with the reversal to the upside has created a bear flag on Starbucks' chart. For the flag to be negated, the stock will need to regain the eight-day exponential moving average (EMA) as support.

Starbucks has two overhead gaps and because gaps fill 90% of the time, it's likely the stock will trade up to fill the ranges in the future. The first gap is between about $117 and $118 and the second gap has a range between $123.44 and $124.21.

Starbucks is trading below the eight-day and 21-day EMAs with the eight-day trending below the 21-day, both of which are bearish indicators. On Monday Starbucks tested the 200-day simple moving average as support and has held above the level, which indicates overall sentiment is bullish.

• Bulls want to see sustained bullish volume pop Starbucks back up above the $114 level. If the stock can regain the level as support, it has room to regain the eight-day EMA and make its way up to fill the closest gap.
• Bears want to see Starbucks continue to reject its overhead resistance and then for the bear flag to be recognized, which could drop the stock back down below a support level near the $111 mark. If Starbucks were to lose the level as support, it would also fall below the 200-day SMA which could push the stock down toward the $107 area.