Perking and Bubbling into Earnings

• Posted by Greg Harmon
• on November 3rd, 2011

Both Starbucks, $SBUX, and Hansen Natural, $HANS, report earnings after the close tonight and both look to be running out of energy. Let’s take a look.

Starbucks

The daily chart above for Starbucks shows the price has been clinging to the 40.80 support level building an expanding wedge over the last month. This is a bearish look, The Relative Strength Index (RSI) pulling back toward the mid line and the Moving Average Convergence Divergence (MACD) indicator growing more negative agree. Support comes lower at 39.50 and then 37 and 34.80. The weekly chart below has the same bearish features with a falling RSI and a MACD that is fading, with this week’s candle growing longer and red after two weeks of doji, indecision. It also adds the trendline support at 38 and the 50 week Simple Moving Average (SMA) at 36.16 which has been a support point previously in the run higher. I see this to the downside. Finally shifting to the options board there is a cautious note with a large of call activity traded on the 41 and 44 strikes which would make sense as a Call Spread upside play, but the Put/call ratio today is nearly even at .95, meaning lots of downside play as well.

Trade Idea: Buy the November 1×2 39/37 Put Spread

Buying the November 49 Put and selling 2 of the November 37 Puts should cost about 5c so there is little invested if it moves higher. on a close below 37 on November Expiry you would own this stock with a 35 basis. On a move lower below 37 take off the 39 Put and one of the 37 Puts. You may opt to limit your risk by buying a 35 strike put for 18c, making your maximum downside at 23c. Other wise be prepared to own the stock at 35 or short sell it to hedge on a move below 35.

Hansen Natural

The daily chart above shows a long trend higher with the neckline of a previous Inverted Head and Shoulders pattern still playing a role. The price seems to be finding some resistance at the 89.40 level as the RSI struggles to break the mid line but with the MACD improving. A move higher has resistance at 92.50 and then the previous high over 95. Support comes at that 89.40 level and then 78.50 below that followed by 69 to 70. The weekly chart below shows the long rising trend and the importance of the 20 week (equivalent to the 100 day) SMA as support, now at 84.24. But notice also that the slope of the SMA’s is shrinking and the RSI is slowly trending lower with a MACD that has turned negative. This looks like a rollover about to happen on the weekly chart. The support near 75 looks good and then near the 50 week SMA at 69.60 below. And I favor the downside. The options suggests about a 10% move by November expiry making a range of 80-98. Activity today favors the downside.

Trade Idea Bearish: Buy the November 1×2 Split Put Spread 85/80-75

Buying the November 85 Put and selling both the November 80 and 75 Put should cost about 50 cents and pays $5 on a close on November Expiry between 80 and 75. Below 75 the $5 return erodes penny for penny with the stock move lower until at 70 you own the stock and have further downside risk. An alternate trade would be to do this with the December Options for no cost, moving all the dates out 1 month.

Trade Idea Bullish: Buy December 90/95 Call Spread and Sell December 75 Put

If you are convinced against my analysis that it is going higher then buying the December 90 Call and selling the December 95 Call to create the call spread should cost about $2.40. By selling the December 75 Put against it you reduce the cost by $2.00, have protection down to 75 and increase the reward to risk ratio to 12.5:1 from 2.1:1. The same Call Spread trade can be down in November for 2.20 but funded by selling the November 80 Strike Put for 1.90 to reduce the cost to 30 cents and improve the reward to risk ratio to 16.67:1 with risk of owning the stock on a close under 80 on Novmeber Expiry.

I will be taking Starbucks and will wait until later today to decide on Hansen Natural

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