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Here Is How to Trade Coke Stock’s Spike on Earnings

Nicolas Chahine

Last year was terrible for the equity markets, as most stocks bottomed on Christmas. But not Coca-Cola (NYSE:KO) — it made a new low just after its last earnings report in February. Luckily for the bulls, it has since mounted a 7% rally off those lows. And more importantly, it’s rallying again today on another earnings report card.

KO Stock: Here Is How to Trade Coke Stock's Spike on Earnings

Source: Coca-Cola

Management delivered a strong quarter in spite of currency headwinds. KO is supposed to be a boring company, but it managed to report 6% organic growth. They even had a few success stories with new flavors.

It wasn’t long ago when experts had rang the death knell for soda, yet here is Coke proving them wrong. They even guided a bit higher going forward. So they didn’t leave much reason to sell the stock on the headline.

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Nevertheless, KO stock came into the earnings event this morning absolutely flat for the year. This morning’s rally, if it holds, will be the base for the year. For the past 12 months, Coke stock is in line with the S&P 500, so maybe it plays catch up for this year to right the shorter-term metric.

This morning’s pop in the stock almost but not completely closes the open gap to $49.50. This is a small concern for the short term, but the zone just above it could be the doorway for more green.

If the KO stock bulls can maintain the rally and close above $50 per share, they could spark a bullish pattern to target $52 or higher. But that won’t be easy, as it would need the help of the broader equity markets. This is not a momentum stock so it’s won’t move as fast as Twitter (NYSE:TWTR), for example. So big moves need bigger reasons. This report, while good, is not enough alone. KO stock needs market-wide follow through to reach new all-time highs too.

So what now?

Looking Ahead in KO Stock

Fundamentally, KO stock is twice as expensive as Pepsi (NASDAQ:PEP). Even in absolute terms, KO’s 32 trailing price-to-earnings ratio is bloated. This is roughly twice as expensive as Apple (NASDAQ:AAPL) and 30% more expensive than Facebook (NASDAQ:FB).

If I already own the shares, I am happy about the rally but it’s not reason to add to my position. For those looking to start a new position in Coca-Cola stock, they need to determine their time frame. If it’s a fundamental position to hold for years to come, then there is no sense in fishing for the perfect entry point. Over the long haul, KO will do well — especially since it pays a 3.3% dividends to boot.

But those who prefer to actively trade Coke stock shorter term have a few lines to know. The first is that this morning’s zone is in theory resistance. Onus is on the bulls to breakout through so they would invite momentum buyers.

Conversely, there is a long-shot bearish scenario that could unfold on the long-term chart. If for any reason KO falls below $44 per share, it could trigger a large bearish pattern that could target $39 per share. This is not a forecast, it is a possible scenario that bulls need to know.

Coca-Cola is a consistent stock that will not cause great harm to portfolios. But that alone is not a reason to follow a spike on impulse. I’d rather wait a few days to see how the bulls are able to handle these prior-fail levels that have lingered since January of 2018.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.

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