Kudos to the The Coca-Cola Co (NYSE:KO) company for topping its third quarter revenue and earnings estimates. On the flipside, condolences to shareholders. Though KO stock initially popped in response to the news, that rally quickly faded as the market remembered a much bigger overhang is still in place.
And that overhang is indeed big, slowly creeping up on Coca Cola stock despite the fact that it’s up 13% since the end of last year. Indeed, it’s been creeping up on KO shares largely because KO stock has been forging ahead without really deserving it. Though a fine company with a forward-looking P/E of 23.3, Coca Cola stock is still vulnerable to a major pullback.
The good news is the bulls and bears have drawn a pretty clear line in the sand.
Well, This Is Different
Full disclosure: This look at the Coca Cola stock chart largely feeds on an analysis done by fellow InvestorPlace contributor Nicolas Chahine, posted on Wednesday morning. Though it superficially looks like I’ve come to the opposite conclusion, that’s not quite the case. Chahine’s call is a neutral-to-bullish one, and short-term at that. My look is only a potentially bearish one and longer-term.
It never hurts to explore all the possibilities.
The weekly chart of KO stock isn’t a tough one to interpret. It’s been guided higher by rising, parallel lines (red) that extend back to 2011. The latest bullish swing, however, was different in that it didn’t test the upper edge of that trading range. Rather, the rally only met the early-2016 peak (blue, dashed) near $47 before fading again. It’s the first time in a long time the stock has failed to test the upper edge of a long-term bullish zone.
Though the failure to reach the upper resistance line is seemingly minor, it’s not. All big trends start out as small ones, and this latest technical development in many ways is a red flag of changing sentiment.
The stock has survived worse. In fact, the support line that’s kept the stock moving higher since 2011 is likely to be tested sooner or later. However, the next test of the lower edge of the trading range may well turn out differently than the last few have, as it may not end with the same bullish reversal we’ve seen for several years now.
Small things can matter. You just have to be willing to see them, or at least acknowledge the possibility. Remember, Coca Cola just posted a pretty positive earnings report. The market responded with a fairly convincing selloff anyway.
A break below the 100-day moving average line (gray) at $45.54 could start the same rollback we’ve already seen unfurl several times since 2012.
Bottom Line for KO Stock
Don’t misread the message. Coca Cola is still a superior investment to PepsiCo, Inc. (NYSE:PEP), having gained North American market share last quarter while Pepsi saw its North American revenue fall for the first time in two years.
The Coca Cola stock dividend isn’t in jeopardy either. The ongoing shift away from sugary sodas toward healthier beverages that don’t command the same prices as soda doesn’t represent the end of the brand as we know it.
This message is still an important one though, underscoring the reality that sometimes a stock isn’t always a reflection of the underlying company’s results. Stocks can and do take on a life of their own, and this may be one of those times. Even if you’re a true long-term owner of KO stock, the potential pullback could hurt.
And if you’re not yet in a Coca Cola stock position, such a pullback is a big buying opportunity. The $37 level, as scary as that may seem, is the most plausible target should the pullback take hold.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
