KO: Time to rejoin the bears?

I held bear positions in The Coca-Cola Company (KO) from December and into the present month. I closed the options spreads a week early to avoid the chance of exercise and am now facing a decision about whether to leave KO on the Roll Shelf or to open a new bear position.

See "KO: Bearish on Coke" for my analysis at the time I opened the initial position.

KO's implied volatility is at the 56th percentile, meaning that the vertical options spreads that are my preferred vehicles aren't advisable. Short shares, or a synthetic short futures position built out of options, is the better course for this roll, if I do indeed take it.

My rule of thumb on a roll is to wait for the price to make a fresh break below its 20-day price channel before opening a new position in the series. KO hasn't done that yet. Its low so far today is $39.36, and today's 20-day price channel lower boundary is $39.

However, the channel is set to rise for next week's open to $39.34, so there's a good chance that KO will send the signal on Tuesday, when the U.S. markets re-open after the Martin Luther King holiday.

That price-channel signal, however, is only the beginning. It's a trigger for me to do a full analysis of the chart to see where things really stand.

I've updated my Elliott wave frame for the KO chart, with the results below. The left-hand chart spans 20 years, the middle one nine months, and the left one 25 days.

Click on chart to enlarge.

KO 20-years monthly bars (left), 9 months daily bars (center), 25 days 20-minute bars (right)

At the largest degree, KO peaked at 1998. My count labels the May 16, 2013 high as either wave 2 {+3} to the upside of the correction since 1998, or wave B {+3}, also to the upside.

In the first case, KO is in a major downtrend -- a secular bear market. In the second, KO is correcting the rise to 1998 but the bull market that produced that peak is still in force.

In either case, the expected count from May 16, 2013 onward is identical, either with wave 3 {+3} to or wave C {+3}. Both are declining waves, and both divide into five subwaves.

In any case, a move below $39 would confirm that the present downward wave of smaller degree, wave 3 {+2}, is indeed underway.

By my count, KO is in wave 5 of wave 1 {+1} of wave 3 {+2} of wave 3 {+3} of something bigger whose nature is not yet apparent. Quite possibly, the wave 5 degree is lower than I've counted -- perhaps wave 5 {-1} of wave 1 of wave 1 {+1} etc.

I find this to be quite a bearish chart. I'm not going to make a trade today but will wait for the break below the 20-day price channel. However, with this analysis, when the breakout comes I'm well prepared to make a final decision.

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.