Dow component McDonald's Corporation (MCD) is showing signs of weakness after a six-week bounce into resistance and could sell off in coming sessions, offering timely short sales for skilled market players. Better yet, the lack of progress above March's three-year low has barely affected depressed accumulation readings, raising the odds that the decline will retrace a good portion of the bounce, potentially reaching a test of that deep support level.

The recovery wave into April stalled at 50-day exponential moving average (EMA) resistance in the mid-$180s, which was broken on heavy volume in February. The uptick has also failed to reach 200-day EMA resistance in the mid-$190s, broken during the same downdraft. Taken together, it's possible that Mickey D's stock has entered a secular decline that will eventually break the first quarter low and reach deeper support near $100.

Restaurant sector headwinds have been well documented, with the coronavirus pandemic forcing closures and/or take-out alternatives around the world. States and countries are slowing resuming dine-in services, but social distancing requirements will reduce capacity and sales, affecting years of growing profits. In addition, McDonald's has to deal with complex real estate issues, with 85% of restaurants owned by franchisees through mandatory lease-back arrangements.

This is a two-edged sword, with the company benefiting from a massive real estate portfolio that adds to income in good times. However, these aren't good times, and real estate prices could slump badly in the next year or two, with millions out of work and unable to pay their bills. In turn, franchisees may be stuck in leases at expensive properties that are losing value at the same time the restaurant industry is trying to recover.

MCD Long-Term Chart (2010 – 2020)

MCD
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The stock broke out to new highs in 2010, entering a strong uptrend that stalled just above $100 in 2012. Multiple rally attempts failed into the second half of 2015 when the all-day breakfast initiative caught fire, yielding a breakout that attracted widespread buying interest. Bullish price action carved a graceful series of higher highs and higher lows into 2019, culminating with August's all-time high at $221.93.

A pullback into November got bought, ahead of a slow-motion uptick that accelerated at the start of 2020. However, the rally reversed at a lower high, completing a double top breakdown in February. The subsequent downdraft cut through support at the 2018 and 2019 lows before ending at $124, the lowest low since February 2017. The monthly stochastic oscillator lifted into a buy cycle just ahead of the January peak and kept that bullish status during the 94-point sell-off, highlighting the contrary nature of current price action.

MCD Short-Term Chart (2017 – 2020)

MCD
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The decline stretched though the .618 Fibonacci retracement of the 2012 to 2019 uptrend and bounced, reaching the .618 sell-off retracement and 50-day EMA during the first week of April. That level has also narrowly aligned with resistance at the double top breakdown and .236 retracement of the uptrend. The stock has now dropped to a four-week low, but don't look for a strong sell signal until it breaks the April 15 low and tries to fill the April 6 gap.

The on-balance volume (OBV) accumulation-distribution indicator topped out in April 2018 and tested that level when price posted August 2019's all-time high. The effort failed, but buying pressure cleared the barrier in January 2020, setting the stage for even stronger gains. However, buyers then headed for the exits, triggering the second failure in two years. OBV is now drifting lower and could test the 2019 and 2020 lows in coming weeks.

The Bottom Line

McDonald's stock could resume its downtrend at any time, rewarding well-timed short sales.

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