Dow component The Coca-Cola Company (KO) reports earnings ahead of Tuesday's opening bell, with analysts expecting earnings per share (EPS) of $0.45 on first quarter 2020 revenue of $8.3 billion. The stock got pummeled in the first quarter, dropping nearly 40% in the biggest decline since 2008. However, it took 14 months to carve a 43% loss at that time, while this year's rout unfolded in less than five weeks. The massive destruction failed a major breakout and ended the 11-year uptrend, even though the forward dividend yield has risen to a generous 3.41%.
Company sales are closely levered to partnerships and distribution agreements with major restaurant and theater chains, theme parks, and other entertainment venues that have been forced to close or curtail operations due the coronavirus pandemic. In addition, Coca-Cola's product line isn't as diverse as rival PepsiCo, Inc.'s (PEP) broad selection of snacks, staples, and cereals, with Coke's products dominated by upscale soft drinks that are likely to lose market share during an economic downturn.
The beverage giant's stock has bounced in the past month, but it's still trading below new resistance at the 50- and 200-day exponential moving averages (EMAs). Buying power has barely dented the first quarter shareholder loss, raising the odds that sellers will reload positions and dump price into a test at the March low in the mid-$30s. A breakdown will expose additional downside into the low $30s, where a 2011 breakout marked the start of a multi-year bull run.
KO Long-Term Chart (1987 – 2020)
Coca-Cola stock turned sharply higher after the 1987 crash, entering a historic uptrend that continued through most of the 1990s. It issued four splits during the ascent, which finally topped out at $44.47 in 1998. That marked the highest high for the next 15 years, ahead of a quick plunge into the mid-$20s, followed by a complex decline that carved a long series of lower highs and lower lows into the 2003 low at $18.50.
It performed poorly during the mid-decade bull market, stalling in the mid-$20s in 2004 and testing the low six months later. Bulls finally returned in force in 2006, lifting price in a healthy uptick that failed at the .786 Fibonacci retracement level in January 2008. The subsequent decline tested the 2003 low for the third time in four years, finding support just 22 cents above that level in March 2009.
A bounce into the new decade completed a round trip into the 2008 high in 2011, ahead of a 2012 breakout that firmly established a new uptrend. Channeled action reached the 1998 high in 2014, initiating more than four years of testing before the stock finally cleared that formidable barrier in the second quarter of 2019. It posted an all-time high at $60.13 eight months later, ahead of a vertical decline that ended at a four-year low in March.
The monthly stochastic oscillator crossed into a sell cycle from the overbought zone in February 2020, predicting at least six to nine months of relative weakness. The indicator is now traversing the panel's midpoint, confirming that bears control long-term price action, despite the short-term uptick. As a result, battered shareholders looking to limit losses should consider closing positions and stepping aside during this bounce.
KO Short-Term Chart (2017 – 2020)
The on-balance volume (OBV) accumulation-distribution indicator fell to 2019 support during the decline, generating a modest bullish divergence compared to price, which hit a four-year low. A brief accumulation phase ended in late March when the stock was trading near $40, while OBV has failed to budge during the April ramp into resistance at the 50-day EMA. The uptick has also reached the .50 sell-off retracement level and March 12 continuation gap, marking a barrier that will be tough to mount in coming sessions.
The Bottom Line
Coca-Cola stock has failed a major breakout and ended the long-term uptrend that started in March 2009.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.