Starbucks (SBUX) shares dropped sharply after the company reported earnings last week, and Dunkin' Brands' (DNKN) stock price has been moving in a sideways consolidation pattern since the beginning of this year.
These recent trends may be about to end, as a pair of so-called "morningstar" technical patterns have formed on Starbucks' and Dunkin's stock charts, signaling potential bullish reversals and providing good risk/reward long entry points.
Let's check them out:
Shares of Starbucks recently retraced 62% of their November to January rally range, a nearly 8% pullback.
Over the last three sessions, however, price action on the daily chart has formed a "morningstar candle reversal," a pattern often seen at important lows. The morningstar is composed of a large down candle, followed by a narrow opening and closing range doji candle and completed by a large up candle. It represents a transition in investor sentiment from bearishness to a neutral outlook and then to bullishness.
Moving Average Convergence/Divergence does not yet reflect the recent price action, but the Relative Strength Index has turned higher after bouncing off of its oversold boundary. Chaikin Money Flow was tracking lower. It is holding right on its center line, but will need to improve to support a reversal in trend.
The stock is a buy at its current level with a position size that allows for a stop under the low of the morningstar pattern.
Jim Cramer and the Action Alerts Plus team hold a position in Starbucks for the AAP investment club's charitable-trust portfolio. On Friday, Cramer and his team wrote in a note to club members that for Starbucks stock, "we would not be buyers until shares dropped toward the $50 threshold." (The stock closed Friday at $55.06.) However, they believe SBUX's long-term story "remains compelling, but management must fix through-put issues and regain investor trust in the short term."
Dunkin' Brands has been moving in a narrow horizontal channel pattern since the beginning of the year, which has compressed its Bollinger bandwidth reading to an extreme level.
Periods of low volatility are often resolved by volatile moves that break the pattern. A reliable reversal pattern that forms at channel support suggests that volatile resolution could come sooner rather than later.
A morningstar pattern has also formed on the Dunkin' daily chart. The stock, which is in a long-term primary uptrend, looks like this potential reversal pattern may confirm another higher low and power the stock to a new higher high. The relative strength index is back above its 21-period average and Chaikin Money Flow is in positive territory.
The stock is a buy at its current level, again, using a position size that accommodates an initial stop under the doji and channel low.
(Editor's note: This article has been corrected to reflect the fact that Jim Cramer and his Action Alerts PLUS team authored Friday's note on Starbucks. Jack Mohr did not co-write the note.)