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: StockCharts.com.

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
E-mail address:	chaitalimohile@yahoo.co.in
Traders' Resource Links
Independent has not added any product or service information to TRADERS' RESOURCE.

Click here for more information about our publications!

Comments

PRINT THIS ARTICLE

Request Information From Our Sponsors

DEPARTMENTS: Advertising | Editorial | Circulation | Contact Us | BY PHONE: (206) 938-0570

Comments or Questions?	Article Usefulness
	5 (most useful) 4 3 2 1 (least useful)

TECHNICAL ANALYSIS

Has Coke Overcome Its Divergence Effect?

Comments

SUBSCRIBE TO OUR FREE EMAIL NEWSLETTER!

SUBSCRIBE TO OUR FREE
EMAIL NEWSLETTER!