After a rocky start to the year, Coca-Cola (NYSE: KO ) shares are on the mend. Since bottoming in early May, the beverage behemoth is up 12.5% in an impressive bout of relative strength. Part of the gains came in response to the late July earnings release, which beat expectations. Since then, KO stock has developed a high base pattern and is on the verge of a breakout.
To set the tone for today's trade idea, let's begin with the broader consumer staples sector. As shown below the Consumer Staples Sector SPDR Fund (NYSEARCA: XLP ) had a terrible start to the year, falling 17.3%. The culprit was rising interest rates, which caused dollars, which would have been flowing into high-dividend paying staple stocks, to move to the safety of now higher-yielding bonds.
It's no coincidence that XLP finally bottomed in May. That's the month that bond yields finally peaked. With Friday's high volume breakout, the Consumer Staples sector is now officially back above the 200-day moving average. This type of price action will bode well for Coca-Cola shares and other heavy hitters in the sector.
The movements in KO stock have followed XLP. Its July earnings release beat expectations and was celebrated by the Street. Since the high volume up-gap, Coca-Cola stock has built a clean high base pattern that has allowed the 20-day moving average to play catch-up. The price action is bullish, and with Friday's rally KO is now on the verge of another breakout.
A rise above $46.80 could signal its next advance is upon us. Consider $48.60, the January peak, the next target.
KO Stock Trade
With earnings in the rear-view mirror, implied volatility has returned to low levels, making option prices cheap. Buying call spreads could be a smart way to play a bullish move here. Buy the Oct $46/$48 bull call spread for 95 cents. The risk is limited to your initial investment and it will be forfeited if Coca-Cola falls below $46 at expiration.
The reward is limited to $1.05 and it will be captured if the stock can rise above $48.
As of this writing, Tyler Craig held bullish positions in KO. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
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