Dow component Coca-Cola Co. (KO) announced this morning that CEO Muhtar Kent will step down, with COO James Quincey taking the helm in May 2017. The news triggered strong buying pressure, indicating that funds and institutions are optimistic the new boss will increase profits and improve annual returns in coming years, after a long period of underperformance.
The stock currently ranks 28 out of 30 Dow Industrial Average components in relative strength, stuck in a sideways pattern that’s now entered its fourth year. This laggard behavior is attracting more attention than usual because the venerable index has broken out to a bull market and all-time high, with many components hitting new highs as well. This competition will keep the pressure on management in 2017 and may have prompted the current CEO’s departure.
KO Long-term Chart (1993-2016)
The stock entered a powerful uptrend in the 1980s, with steady buying interest continuing through most of the 1990s. The stock split four times during this fruitful period, which ended abruptly at $44.47 in July 1998 at the end of the Asian Contagion. It then entered a virulent downtrend, dropping in volatile waves into the 2003 low at $18.50. That price level marks the lowest low in the last 13-years.
It took another three years for the stock to turn higher in an uptrend, with an October 2006 breakout above an 8-year trendline attracting strong momentum buying interest that fizzled out $32.79 at the start of 2008. It joined world markets in the economic collapse later that year, finding support in the teens in March 2009. The subsequent bounce posted two waves into the 2008 high, ahead of a 2011 breakout that unfolded in a broad rising channel.
The uptrend lost momentum after reaching resistance the 1998 high in May 2013, triggering a proportional reversal followed by slightly higher 2014 and 2016 highs. Those rally impulses failed to clear gravity at the multi-decade peak, triggering deep pullbacks that have punished breakout buyers. The current decline hit a 14-month low at 39.88 last week, yielding a bounce within a 4-month falling channel.
Monthly Stochastics has now dropped into the deepest oversold technical reading since 2008, predicting that selling pressure may be exhausted, allowing the stock to enter a new recovery wave. The decline has also reached deep support at the 50-month EMA and 8-year trendline, adding reliability to a bottoming call that could yield upside in the first quarter of 2017. This upturn could also mark the final assault on 1998 resistance, yielding a multi-decade breakout.
KO Short-term Chart (2014-2016)
On Balance Volume (OBV) peaked at the end of 2014 and descended in a straight line into the August 2015 low while the subsequent rally lifted the indicator into an April 2016 test of the prior high. The subsequent reversal ended months of buying pressure, in a distribution wave that continued into November. The indicator has been grinding sideways for the last month, possibly indicating exhaustion that favors bulls in coming months.
The selling wave that started in April 2016 unfolded in a falling channel that undercut the .618 Fibonacci selloff retracement level at the end of November. It popped back above that level this week, setting off a short-term 2B buying signal that denotes the failure of bears to hold new resistance. The dip and pop dovetails nicely with a bottoming scenario now supported by a broad swatch of technical readings.
The Bottom Line
Coca-Cola rose more than 2% on Friday morning after announcing a key management change that bulls hope will underpin profits and equity returns. Recent technical activity points to a tradable low that will issue an entry signal when the stock rallies out of the falling channel in place since April. It’s also possible the next recovery wave will eventually trigger a multi-decade breakout above stubborn resistance in the mid-40s.
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