Coca Cola needs no introduction. According to Forbes, excluding the top 5 big tech in the U.S., the beverage company has the most valuable brand in the world. Fame and recognition, however, don’t make a company immune to market declines.
In roughly a month during the 2020 COVID crash, Coca Cola stock fell from ~$60 to just over $36 a share. That 40% plunge, fortunately for the bulls, was followed by a recovery to nearly $55 by the end of the year. The stock closed at $49.15 yesterday. Is this a dip to buy or the start of another major selloff?
The daily chart above makes it possible to examine KO’s development from its $60.13 top from an Elliott Wave perspective. The sharp fall to $36.27 can be seen as a five-wave impulse, labeled 1-2-3-4-5 in wave A. The theory states that a three-wave correction follows every impulse.
Another 40% Crash Threatens Coca Cola Investors
That is exactly what we think had been in progress in the next nine months. The corrective rally in Coca Cola stock looks like a simple (a)-(b)-(c) zigzag, where wave (b) is a triangle and wave (c) – an ending diagonal. If this count is correct, the bearish reversal from $54.93 is the beginning of wave C down. C-waves usually breach the ending point of the corresponding wave A. This means bearish targets below $36 a share make sense as long as the top of wave B remains untouched.
Besides, the stock trades at a multiple to free cash flows of ~25. That would have been justified for a company growing at around 25% a year. Coca Cola’s FCF figure, however, has barely grown over the past five years. Elliott Wave aside, it makes a lot more sense for the price to go down rather than up from here. In our opinion, there are plenty of reasons to prepare for a drop to the low $30s in the months ahead.
Similar Elliott Wave setups occur in the Forex, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!