McDonald's Corporation (MCD) has outperformed in recent months, lifting to an all-time high while other Dow components slumped to multi-month lows. Healthy comparative sales and an aggressive refranchising program have caught shareholders' attention, generating a steady but unimpressive flow of buying interest. Up to this point at least, foreign customers haven't lost their appetite for this classic American brand despite growing political and trade tensions.
However, the stock has made little progress since clearing resistance at the January high in November, closing last week just 2% above that support level. The initial rally wave ended after just six sessions, giving way to choppy sideways action that has now lasted for more than four weeks. Ominously, this failure to post higher prices has induced weekly relative strength indicators to roll over into sell cycles, raising the odds that the breakout will fail heading into year end.
Bulls hope that past is prologue because the stock has defied gravity in other market downturns, holding within a trading range in 2008 and 2009 while breaking out in a series of new highs in 2015 and 2016. However, this counter-cyclical behavior is less likely in coming months because the attack on globalization and free trade has the potential to severely limit growth opportunities for all multinationals, including Mickey D.
MCD Long-Term Chart (2007 – 2018)
The stock returned to the 1999 high near $50 in 2007 and broke out, entering an uptrend that ended in the mid-$60s at the start of 2008. It tested support during the October crash, but buyers prevailed, carving the final stage of a diamond pattern that broke to the upside in 2010. The subsequent trend advance attracted widespread interest, stalling just above $100 in 2012. That marked the start of a persistent trading range that denied 2013 and 2014 breakout attempts.
October 2015's high-volume breakaway gap finally cleared resistance, generating an uptrend that peaked above $130 in May 2016. A steady pullback ended after the presidential election, marking a major buying opportunity ahead of a rally that posted the strongest gains so far this century. The upside fizzled out near $180 in January 2018, when the stock turned lower with the broad market in reaction to growing trade tensions.
MCD Short-Term Chart (2017 – 2018)
A decline into March bottomed out in the upper $140s, giving way to a volatile trading range with resistance in the upper $160s. It cleared that barrier in reaction to a strong October earnings report, reaching January resistance just two sessions later, ahead of a Nov. 5 breakout that stalled near $188. The stock has posted two nominally higher highs since that time, while subsequent reversals have forced many momentum buyers out of positions.
The selling wave that started on Nov. 29 is now testing five-week range support at $182, with a breakdown bringing the January high into play. Breakout support has now aligned with the 50-day exponential moving average (EMA), while the weekly stochastics oscillator has flipped into a sell cycle. This potent combination establishes a line in the sand just below $180, with further downside triggering a failed breakout and major sell signal.
The on-balance volume (OBV) accumulation-distribution indicator confirms the stock's vulnerability heading into 2019, failing to reach April's all-time high, which printed when the stock was trading much lower than the most recent close. This lack of sponsorship could now come home to roost, forcing McDonald's to turn tail and join other Dow components struggling with a more dangerous global environment.
The Bottom Line
McDonald's looks set to test the November breakout after failing to build on rally gains in the past five weeks. Bulls need to hold the $175 to $180 price zone or risk a bearish pattern failure that could trigger much lower prices.
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>