Fast food giant McDonald's Corporation (MCD) reports quarterly earnings before the opening bell on Tuesday, April 30, after the stock tested its semiannual risky level at $197.97 at its all-time intraday high of $198.60 on April 26. The stock is not cheap, as its P/E ratio is 25.15 with a dividend yield of 2.35%, according to Macrotrends.
McDonald's shares closed Friday, April 26, at $197.42, up 11.2% year to date and in bull market territory at 28.9% above the Aug. 2 low of $163.13. Between Nov. 29 and Dec. 26, the stock declined 11.4% from $190.88 to $169.04.
Analysts expect McDonald's to post earnings per share between $1.73 and $1.76 when it reports results on Tuesday. Some on Wall Street expect more of the same success that allowed the burger chain to report two consecutive years of traffic growth in its latest earnings released on Jan. 30. Others are worried about worldwide growth and revamping stores to energize sales, which may lead to the announcement of cost controls. I have noticed that the company has slipped in a few price increases.
The daily chart for McDonald's
McDonald's has been above a "golden cross" since Oct. 16, when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher prices lie ahead. This signal was in play when the stock reached its all-time intraday high of $19.60 on April 26.
The close of $177.57 on Dec. 31 was an input to my proprietary analytics and resulted in an annual value level at $177.99 and a semiannual risky level at $197.97, which was tested at the high. The close of $189.90 on March 29 was the latest input to my analytics and resulted in monthly and quarterly risky levels at $201.33 and $208.10, respectively. This week's pivot is $195.75.
The weekly chart for McDonald's
The weekly chart for McDonald's is positive but overbought, with the stock above its five-week modified moving average of $181.33. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $143.54, last tested during the week of Sept. 11, 2015, when the average was $95.65. The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 92.90 this week, moving above the 90.00 threshold as an "inflating parabolic bubble."
Trading strategy: Buy McDonald's shares on weakness to the 50-day simple moving average at $186.88. Reduce holdings with the stock between its weekly pivot at $195.75 and its semiannual risky levels at $197.97. Above is my quarterly risky level at $208.10.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February and March. The quarterly level was changed at the end of March.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.