McDonald's Earnings Reaction Could Signal Long-Term Top

Dow component McDonald's Corporation (MCD) lost ground on Wednesday, missing out on the Fed-fueled rally after beating fourth quarter profit estimates. The fast food giant met quarterly revenue expectations as well, but a 3.3% decline in year-over-year revenues kept potential shareholders on the sidelines, worried that McDonald's has squeezed the last penny out of a multi-year reorganization that has underpinned higher profits.

The stock outperformed broad benchmarks in 2018, posting a 3% annual return, and reversed within two points of November's all-time high last week. The earnings news triggered lots of smoke but little fire, carving a nine-point range ahead of a 40-cent loss at the closing bell. However, higher-than-average volume added to a bearish pattern that has dropped the on-balance volume (OBV) accumulation-distribution indicator to the December low, giving up all of 2019 buying power.

More ominously, long-term relative strength readings flipped to the sell side in January, predicting that the stock won't break out despite its proximity to new highs. For now, that means watching Wednesday's low at $178.67 because a violation would also break 50-day exponential moving average (EMA) support in place since Jan. 7, raising the odds for a test at the December low while potentially completing a bearish double top pattern. 

MCD Monthly Chart (2007 – 2019)

Monthly chart showing the share price performance of McDonald's Corporation (MCD)

The stock broke out above the 2000 high at $49.56 in 2007 and stalled in the mid-$60s in the first quarter of 2008. It carved a diamond pattern on top of new support during the economic collapse, exhibiting unusual resiliency that contributed to a secondary breakout in 2010. That uptick posted impressive gains into the start of 2012, topping out at $102.22 and selling off into the mid-$80s, which marks the lowest low in the past six years. 

Breakout attempts in 2013, 2014 and 2015 failed, but buying power surged after the introduction of the wildly popular All-Day Breakfast menu. Price action finally cleared resistance in October 2015, again ignoring broad market headwinds, and stalled above $130 in May 2016. An orderly pullback found committed buyers in the fourth quarter, while a rally into January 2018 fed off a successful reorganization that increased franchise cash flow.

The stock sold off with the broad market in February 2018 and found support in the $140s one month later, yielding an eight-month basing pattern in the $150s and $160s. An October base breakout reached an all-time high at $190.88 in November before turning tail in a 22-point year-end malaise. The monthly stochastics oscillator has now crossed into the first sell cycle since April 2018, despite the bounce into January, predicting relative weakness into the second or third quarters.

MCD Weekly Chart (2015 – 2019)

Weekly chart showing the share price performance of McDonald's Corporation (MCD)

Price action since 2015 has carved an Elliott five-wave rally pattern that entered a fifth wave (third rally wave) in February 2018. That buying impulse reversed in November after adding 44 points. The first wave between August 2015 and May 2016 added 44 points as well, raising the odds that the three-year uptrend has come to an end because classic Elliott patterns frequently carve two identically sized rally waves.

However, this is conjecture rather than fact at this point because price action is still holding the November breakout above the January 2018 high. It tested and broke support in December but remounted that level in January, while this week's earnings report has triggered a second test. This highlights the importance of Wednesday's low because a failed breakout will also add evidence that the Elliott rally is over.

In addition, the stock entered distribution mode three weeks prior to the rally's peak in November and is testing the December low after Wednesday's high-volume but small point decline. The failure to gain ground on a day the Dow Jones Industrial Average rose nearly 2% also marks a bearish divergence, especially with positive earnings and upbeat commentary. Taken together, continued caution is advised despite the stock's proximity to new highs.

The Bottom Line

McDonald's stock may have completed a multi-year uptrend and will likely now enter a long period of underperformance.  

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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