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Has Coke Overcome Its Divergence Effect?

07/02/07 12:22:47 PM
by Chaitali Mohile

Coca-Cola Enterprises rallied upward on strong negative divergence. Will any buying opportunities be introduced by reducing divergence?

Security:   CCE
Position:   Buy

Soft-drink manufacturer Coca-Cola Enterprises (CCE) formed a bottom by consolidating in a range of $20–$21 for more than three months from early 2007. A moving average crossover supported the strong range-bound breakout, and the stock rallied from $21 to $22 and then consolidated. The stock consolidated with every high made; such stocks are considered to be strong, provided other supporting oscillators are equally positive. Though Coca-Cola is strong by itself, the rally was not supported by positive indicators on Figure 1.

The price broke out at $21 along with a bullish moving average crossover, and the relative strength index (RSI)(14) also geared up its upside rally. With a first high at $22, the RSI (14) reached its highly overbought area. As a result, the price may have consolidated at that level but soon made a second high and thereafter a third one at $24, whereas the RSI (14) turned negative by forming lower highs. Meanwhile, the moving average convergence/divergence (MACD)(12, 26, 9) also has a negative divergence with the same breakout point. The average directional movement index (ADX)(14) reached a highly overheated level and then moved straight rather than correcting. This indicates the bullish strength in trend.

FIGURE 1: COCA-COLA, DAILY. Here's a slow but bullish rally on negative divergence in CCE.
Graphic provided by:
So the negative divergence weakened the upward rally. The script had its own strength to hold onto a strong uptrend and faced the negative effect of divergence.

However, CCE seems to coming out of negative divergence. The MACD (12, 26, 9) has a bullish crossover, marginally retesting its trigger line support. The RSI (14) held the support at 50 and is now ready to move to its highs. A highly overheated ADX (14) declines toward 38, indicating strength in an uptrend.

Traders can see a good bullish rally if the price moves ahead of the upper trendline. This trendline breakout can be bought with the target of its previous high in 2004 at $28. The stock in a long-term view has broken out of a long consolidation period of about two years. Thus, this reducing impact of negative divergence can be surely bought above $24 with an investment point of view.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
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