Chart Of The Day: Coke Heading Towards $40 Despite Earnings Beat, Raised Outlook

  • Stock Market Analysis

Coca-Cola's (NYSE: KO ) $0.69 EPS and $11.1 billion revenue beat expectations. The positive surprise extended a pattern in which the world's largest beverage maker beat estimates for the seventh straight quarter.

It was also its eleventh consecutive EPS beat. Moreover, it raised its full-year outlook having devised two strategies to manage rising costs:

  1. pass them on to consumers
  2. offer more affordable alternatives

Tipranks surveyed 15 Wall Street analysts whose cumulative recommendation is a Strong Buy and the average price target is $65.67, 11.40% up from its Tuesday close.

So, what's my problem with Coke?

KO Daily

Yesterday's trading pattern developed an exceptionally bearish hanging man with a very long lower wick. If the price closes in Wednesday's trade below Tuesday's opening price, it will confirm the expectation for a selloff.

The hanging man dynamic is when the bullish close near the top of the session—having rebounded from its lows—sucked in bulls. However, the following session's close below the hanging man's real body will likely motivate bulls to reconsider their optimism. They will close their positions, increasing supply and lowering prices. That move may attract short selling, which will reduce the price.

The hanging man's bearish potential is reinforced by its location on the chart, confirming the neckline of a sizeable H&S top between Dec. 10, 2021, and Sept. 23, 2022. The price level also coincides with where the neckline meets the broken uptrend line since the dramatic 2020 bottom.

At the same level, the 50 daily moving average (DMA) awaits, after having fallen below a falling 200 DMA, the most bearish Death Cross.

Finally, follow the volume. It spiked when the stock was crashing, completing an H&S top, and thinned when prices rebounded in the return move—until Tuesday's earnings beat. However, I'm counting on that volume spike sucking in all the greedy bulls, who'll be the driving force if the price finds resistance by the H&S's neckline.

Note, while the hanging man's lower wick is very long, a potentially bearish setup, its slight upper wick renders the candle imperfect, potentially deflating some traders' overconfidence.

Target

A $7.70 move from the Apr. 25, $67.20 H&S top to its Sept. 21, $59.50 breakout from the breakout point targets $51.8.

KO Weekly
On the weekly chart, the RSI is retesting its neckline, corresponding to that of the price, whose return move was motivated by the 200 week MA. Like the daily chart, the volume provides a negative divergence, falling against the rising price. Such a paradox suggests diminishing participation and, therefore, a leading indicator for a reversal.

More importantly, the weekly chart may reveal an even large H&S in the making, where our daily H&S is merely its head.

Target

A $13.18 move from the Apr. 25, $67.20 H&S top to its Oct. 10, $54.02 low move from the breakout targets the $40.00 level.

Trading Strategies - Short

Conservative traders should wait for a close below $58.80 to confirm the hanging man. Then a return moves to approve the neckline's resistance.

Moderate traders would wait for the bearish confirmation and a throwback for a better entry, if not confirmation.

Aggressive traders could short now, provided they accept the higher risk.

Trade Sample - Aggressive Short

  • Entry: $59
  • Stop-Loss: $62
  • Risk: $3
  • Target: $50
  • Reward: $9
  • Risk-Reward Ratio: 1:3

Disclaimer: The author has no position in the instruments mentioned in this article.

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