Dow Component The Coca-Cola Company (KO) has lifted to an all-time high in recent weeks, defying broad-based selling pressure that dropped the venerable average nearly 11% in October. This bullish rotation bodes well for the perennial underperformer, signaling a growing appetite for defensive plays that can withstand rising bond yields and falling crude oil prices. Even so, this slow mover won't fit all investment styles, especially those chasing short-term returns.
The soft drink giant is pushing deeper into the energy drink category, prompting sleepless nights for Monster Beverage Corporation (MNST) shareholders, and Coca-Cola is considering entry into the cannabis beverage industry. These niche segments have the potential for stronger growth than clever marketing or endless incarnations of cola, water and sugared drinks. The pot objective remains the wild card in this equation because no one knows the profit potential of this embryonic, and mostly illegal, industry.
KO Monthly Chart (1992 – 2018)
A five-year uptrend stalled just above a split-adjusted $11.00 in 1992, ending a buying impulse that started at $1.81 during the October 1987 crash. The rally resumed in 1994, clearing resistance while entering an even stronger advance that continued into the 1998 high in the mid-$40s. That peak has marked steep resistance for the past two decades, ahead of a volatile downturn that gathered stream into the first quarter of 2003.
The stock bottomed out in the upper teens and turned higher into 2004, but the uptick made little progress, stalling in the mid-$20s. A test at the low a few months later held support but failed to attract strong buying interest until a 2006 rally that stalled at the 50% sell-off retracement level at the end of the mid-decade bull market. The subsequent decline relinquished those gains, testing the 2003 low for the third time.
The 2009 low marked a historic buying opportunity, completing a multi-year base, while the subsequent uptick cleared 2007 resistance in 2011. The rally's trajectory eased into a shallow rising channel in 2013, right after reaching 1998 resistance, establishing a bullish but low-energy pattern that remains in force more than five years later. The most recent buying impulse has now reached channel resistance that is situated just seven points above 1998's historic peak.
KO Weekly Chart (2013 – 2018)
The stock still hasn't cleared 20-year-old resistance (blue line) and could turn lower here, dropping to channel support near $43. For that reason, market technicians should watch for a bullish change in character that supports a channel breakout, setting off much stronger buying signals than other rally impulses since 2013. Fortunately for shareholders, July into October basing action (green ellipse) on top of the 1998 high raises the odds for that bullish outcome.
The on-balance volume (OBV) accumulation-distribution indicator is now testing the January 2018 high, which corresponds with the last rally wave. Just a single high-volume buy day is needed to lift this measure to an all-time high, establishing a stiff tailwind for a channel breakout. Weekly and monthly stochastics oscillators are cooperating as well, glued to overbought levels that indicate bullish control.
For now, a pullback to the top of the three-month basing pattern at $47 looks like a low-risk buying opportunity for investment positions intended to be held for at least three to five years. That support level would offer a perfect opportunity for bulls to change the rules of the game, denying another trip into deep support while establishing the momentum characteristics needed to mount five-year channel resistance.
The Bottom Line
Coca-Cola stock has rallied above long-term resistance in the mid-$40s but remains stuck within a shallow channel that is limiting upside. Market players should now watch for a bullish change in character that supports a channel breakout above $50.
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>