Coke: A Trading Play from Rhodes

01/17/2003 12:00 am EST

Focus:

Richard Rhodes

Founder, Rhodes Capital Management

"Despite our longer-term bearish outlook, we objectively note the emergence of very bullish bottoming patterns in many of the indices we follow," says Richard Rhodes, editor of the technically-inclined, trading-oriented service, The Rhodes Report. "Therefore, we must look towards those stocks we believe shall move higher if in fact these bullish patterns come to fruition." Here's his trading pick.

"Our choice to trade a long position is the more prosaic Coca-Cola (KO NYSE).  The stock is showing emerging bullish technicals that are forming on both a daily and weekly basis. KO needs no introduction, but we will note that the stock does in fact pay a modest dividend on the order of 1.78%. From a trading perspective, we believe the risk-reward is very good, and this position should provide upside protection at very little cost if in fact we are wrong in our assessment.

"On a weekly basis, price action has formed major support over the past few years at the $42.50 to $43.00 level after having declined from its 1998 high near $90. KO formed its major high in 1998, two years before the general market. In 2000, 2001 and 2002 traders would have done well to use this major support level to purchase shares, as each rally has moved a minimum of 20% higher.

"Further supportive of higher prices is the fact an 'outside reversal week' recently formed, and thus we would expect further follow through to higher levels given the fact it occurred from major support in conjunction with the turn higher in the 10-30 week price oscillator. These factors are bullish, regardless of our negative fundamental outlook on the overall market. Risk is back to the lows at $42.00. Thus, we are risking $2.50 for a potential move back into overhead resistance between the 50-week moving average at $50, and the 2000 highs at $62."

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