Coca-Cola in Retreat After Reducing Guidance

Dow component The Coca-Cola Company (KO) met fourth quarter profit and revenue estimates in Thursday's pre-market earnings release but lowered fiscal year 2019 earnings per share (EPS) guidance, triggering a sell-the-news reaction that dropped the stock more than 3% ahead of the opening bell. The downturn could mark the third reversal just above multi-decade resistance in the past 12 months.

The beverage giant's stock has struggled to mount and hold the $50.00 level since rallying above the 1998 high at $44.47 in 2016. This momentum failure hasn't forced many shareholders out of long-term positions thanks to a healthy 3.14% dividend yield, but Coca-Cola is still underperforming other Dow components by a wide margin. Meanwhile, long-term support keeps creeping higher and is now located just five points under the current price.

KO Long-Term Chart (1989 – 2019)

Long-term technical chart showing the performance of The Coca-Cola Company (KO)

The stock broke out above 1987 resistance at a split-adjusted $3.32 in 1989, entering an uptrend that stalled in the low teens in 1992. A narrow consolidation yielded a secondary breakout in 1994, marking the start of a more vertical advance that continued into the 1998 high at $44.47. That marked the highest high in the next 16 years, ahead of a multi-wave decline that ended in the upper teens in March 2003, marking the lowest low in the past 16 years.

A weak bounce stalled at the six-year trendline of lower highs in 2004, yielding two tests at 2003 support, followed by a 2006 uptick that finally broke trendline resistance. Buying pressure eased at the 50% bear market retracement level at the start of 2008, giving way to a downturn that accelerated during the economic collapse, dropping the stock within 22 cents of the 2003 low in March 2009.

A healthy recovery wave completed a round trip into the 2008 high in 2010, yielding a breakout but little momentum until 2013, when price action eased into a rising channel that remains in force nearly six years later. Sellers have generated a single channel violation in this period, during the August 2015 mini flash crash. Bullish price action broke 1998 resistance in 2016, but upside has been elusive since that time, adding just three points. 

Long-term channel support has now lifted into the $43 to $44 range, around the 50-month exponential moving average (EMA), giving the stock less wiggle room during the current downturn. The channel won't last forever, but shareholders hope that new initiatives that may include cannabis drinks will underpin growth and keep buyers active at support. Even so, it will take a lot of good news at this point to trigger a breakout that greatly increases the mediocre price rate of change.

KO Short-Term Chart (2015 – 2019)

Short-term technical chart showing the performance of The Coca-Cola Company (KO)

Removing channel lines on the daily chart brings short-term price levels into view, assisting directional analysis. The stock failed three 2018 attempts to break resistance at the 2016 high but finally mounted that level in November. The December sell-off tested new support successfully while carving the third point of a rising lows trendline that is now aligned with the breakout level. This highlights critical support at $47, which is situated less than 1.5 points under the current price.

The on-balance volume (OBV) accumulation-distribution indicator reveals that Coca-Cola stock was in a good position to break out and rally into the $50s ahead of this morning's mixed report. OBV returned to the February 2018 level in November and completed an unusual cup and handle breakout ahead of the news, predicting higher prices. However, selling pressure could now drop the indicator through the red line, voiding this bullish signal.

There isn't much for shareholders to do right now except to watch narrow levels of interest that include the round number $50, breakout support at $47 and channel support at $43. Beware of a downside domino effect if price action fails the November breakout and generates a rapid decline into the channel. Bulls need to hold that trading floor at all costs because a breakdown would end the 10-year uptrend.

The Bottom Line

Coca-Cola stock is trading lower after the beverage giant reduced 2019 EPS guidance in reaction to currency headwinds and could test support at $47 in the coming sessions.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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