Coca-Cola Beat Earnings, but Shares Have Gone Parabolic

The Coca-Cola Company (KO) reported better-then-expected earnings before the opening bell on Jan. 30. The stock has been trading higher on the news and set an all-time intraday high of $60.07 on Friday, Feb. 14. My call is to reduce holdings with the stock between its weekly and monthly risky levels at $60.07 and $60.43, respectively. The stock closed last week at $59.95, up 8.3% year to date and in bull market territory at 35% above its 52-week low of $44.42 set on Feb. 27, 2019.

Wall Street touts Coke as a safe investment with a 3.74% dividend yield. I like stocks in the Dow Jones Industrial Average to have a dividend yield above 3% to be a member of the Dogs of the Dow for 2020. My reason for recommending some profit-taking is that its 12 x 3 x 3 weekly slow stochastic reading is extremely elevated at 92.56. This puts the stock in an "inflating parabolic bubble" formation.

Revenue growth is being helped by Coke Zero Sugar. I know this brand because it's always on my shopping list when I shop at my local Publix grocery store. Most of the time, Publix has a BOGO deal. I stock up on buy one get one or buy two get three offerings. Coke offers soft drinks in various sizes, and smaller portions have gained popularity. Coke Zero saved the company and hence the stock.

The daily chart for Coca-Cola

Daily chart showing the share price performance of The Coca-Cola Company (KO)

The daily chart for Coca Cola shows that the stock has been above a "golden cross" since May 20, 2019, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher levels would follow. This pattern remains in play today.

The close of $55.35 on Dec. 31 was an important input to my proprietary analytics. Its annual pivot at $55.71 was crossed to the upside on Jan. 13. Its quarterly and semiannual value levels are converged at $52.73 and $53.67. The close of $58.40 on Jan. 31 was another input to my analytics, and the monthly risky level for February is $60.43. This week's pivot is $60.07.

The weekly chart for Coca-Cola

Weekly chart showing the share price performance of The Coca-Cola Company (KO)

The weekly chart for Coca Cola is positive but extremely overbought, with the stock above its five-week modified moving average at $57.39. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $46.59, last tested during the week of June 29, 2018, when the average was $43.12.

The 12 x 3 x 3 weekly slow stochastic reading ended last week rising to 92.56, up from 91.26 on Feb. 7. This is well above the overbought threshold of 80.00 and also above 90.00, putting the stock in an "inflating parabolic bubble" formation.

Trading strategy: Buy Coca-Cola stock on weakness to its quarterly and semiannual value levels at $52.73 and $52.67, respectively, and reduce holdings on strength to its weekly and monthly risky levels at $60.07 and $60.43, respectively. 

How to use my value levels and risky levels: The closing price of the stock on Dec. 31, 2019, was an input to my proprietary analytics. Quarterly, semiannual, and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons. Monthly levels for February were established based upon the Jan. 31 closes. New weekly levels are calculated after the end of each week. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, while annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which typically is followed by gains of 10% to 20% over the next three to five months.

Want to learn how to integrate trading levels into your everyday trading strategy? Check out my new publication, 2-Second Trader.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

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