Chart Of The Day: Buy Coca-Cola’s Drinks, Stay Away From Its Shares

KO Daily Chart

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Coca-Cola (NYSE:) is scheduled to report Q4 earnings on Thursday before market open. The consensus EPS forecast for the quarter is $0.43 on revenue of $7.06 billion. For the same quarter EPS came in at $0.39 on revenue of $7.5 billion.

It’s worth noting that in the last 16 quarters, the soft drinks giant beat the consensus EPS forecast 13 times and matched the forecast once. In four years the company only missed once on consensus EPS forecasts once.

However, after this string of beats, the company will have to surprise significantly in order for the stock to see a boost. Either that or some real progress in the U.S.-Sino trade talks.

As a consumer staple, Coca-Cola is likely to do better than cyclical sector stocks, if increasing fears of an end to the longest bull market in history materialize. Nonetheless we’re seeing signs of weakening share momentum.

Others, however, are more upbeat. Carter Worth, head of technical analysis at Cornerstone Macro, said Friday on CNBC’s Option Action that the charts suggest Coca Cola is about to break out higher. He points to the stock’s outperformance among components last year. While the index rose only 4% during that period, KO gained rising 15%. He also relies on the uptrend line since May 2018.

We’re not as optimistic. In our view momentum is faltering. The stock has bounced on top of the 200 DMA four times since July. The question traders need answered is whether the price will scale above the $50.84 November peak and keep the short-term and medium-term uptrends in sync with the long-term.

If the RSI is any indication, it won’t, because the momentum indicator provided a negative divergence, falling during the Christmas-Eve selloff, even as the price stayed above the October low. This suggests prices are headed to those lows as well. In addition, the weekly RSI is developing what may prove to be a massive Head & Shoulders top.

However, after the 5% jump to $47 in the past two weeks, we would advise waiting for either a pullback, at least to the uptrend line since the post-Christmas rally, at the $48 level, or for a new peak, above the November peak, to pave the way for a continued uptrend.

Moreover, yesterday’s trading pattern developed a shooting star, demonstrating that bears had the final say. Considering that shares closed yesterday at $49.61, below the psychological $50 level, as well as below the $50.84 November peak, we’re betting on a downside move.

Trading Strategies

Conservative traders should wait for a new peak to confirm the uptrend line, followed by a return move that would demonstrate sufficient demand to pick up whatever supply remains at those levels, to take prices further higher. This would be demonstrated with at least one long, green candle, following a red or small candle of either color.

Moderate traders would wait either for a new peak, followed by a downward correction for a better entry, but not necessarily to test the trend, or for a correction to $48, at the top of the January consolidation, by the 50 and 100 DMAs and the uptrend line since the pre-Christmas rout.

Aggressive traders may enter a short, providing an attractive risk-reward ratio, except in the case of slippage.

Trade Sample

  • Entry: $49.60
  • Stop-Loss: $50
  • Risk: $0.40
  • Target: $48
  • Reward: $1.6
  • Risk-Reward Ratio: 1:4

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