One of the nation’s favorite coffee brewer’s stock, SBUX, has been on a tear lately rallying almost 18% off it’s low made in early November of this year. However, all good things come to an end and also for SBUX we see a larger correction coming, which we believe should be bought. Why?
For those of you who follow us, you know that we apply Elliot Wave Theory (EWT) to understands the market current price action and forecast the next. It is a very powerful tool, when used in the right context; i.e. with other chart analyses techniques. Here we’ll only show the wave-count to keep things brief and easy to understand.
The essence of EWT is once a first and second wave (in this case red i, ii) are completed, price then moves into it’s 3rd, 4th and 5th wave. The 3rd wave (red iii) often travels between 138.2 to 161.8% of the length of wave 1, measured from 2. Here we can see how SBUX’ wave iii peaked in between – exactly at the 1.500x i – those two so called Fib-extensions. Then the 4th wave (red iv) typically retraces back to the 100% extension. Here we can see that red iv did exactly that. The 5th wave often targets the 176.4 to 200% Fib-extension. In this case we already have wave 5 (v) longer than wave-i and it is also subdividing in 5 smaller (green) waves, with likely the 4th wave completed. Using the (green) 5=1 relationship from (green) 4, we then get to exactly the 176.4% extension to complete a large 1st wave (black 1) at $59.65. If our analyses of the price action is correct, which we believe it is, then SBUX should embark thereafter on a correction that brings price back to the black square; a typical wave 2 target zone: $56-$54. What happens then is going to be an explosive move to the upside which eventually will target low to mid-70s. So should you buy the dip? We think it be a good risk/reward trade.