McDonald's Stock May Have Bottomed Out

Dow component McDonald's Corporation (MCD) took a dive in October after missing third quarter profit and revenue estimates, posting a seven-month low in the upper $180s. The stock has crept higher into 2020 and is now trading about three points under the big gap posted after the earnings shortfall. It has also remounted the 200-day exponential moving average (EMA) after a notable breakdown, with both elements raising the odds that the stock has finally bottomed out.

However, Rome wasn't built in a day, and it will take time for Mickey D to recover from weakened sentiment and a sizable shareholder exodus. It also has to fill October's gap and overcome sell signals that are likely to accumulate at and above $206. In turn, this tells market watchers to pay close attention to price action as the company approaches the fourth quarter earnings release, scheduled for Jan. 29.

MCD Long-Term Chart (1999 – 2020)

A multi-year uptrend topped out near $50 in the fourth quarter of 1999, marking a peak that wasn't challenged for the next seven years, ahead of a downturn into the new millennium. Selling pressure eased in the mid-$20s in early 2001, establishing a support level that finally broke in the summer of 2002. Bears pounded the bids into the first quarter of 2003, when the stock bottomed out at a 10-year low in the lower teens.

The subsequent bounce posted healthy gains during the mid-decade bull market, completing a round trip into the prior century's high in May 2007. An immediate breakout ran into a buzzsaw of sellers after reaching the low $60s, carving a volatile trading range on top of new support. Even so, the stock held up well compared to rivals during the 2008 economic collapse, setting the stage for a secondary breakout when the calendar flipped into 2010.

The stock topped out once again in the first quarter of 2012, yielding heavy resistance at $100 that denied multiple breakout attempts into October 2015. The "all-day breakfast" initiative attracted substantial buying interest at that time, triggering a breakout that unfolded through a broad Elliott five-wave advance. That bullish pattern finally completed in the summer of 2019, giving way to the steepest correction in more than 10 years.

The monthly stochastics oscillator crossed into a sell cycle from the overbought zone in August 2019 and has just turned higher above the oversold zone. However, this wiggle could mark a false signal, especially with gap resistance just overhead. In addition, the rebuilding process may require range-bound action over a period of months, and that could easily unfold without a supportive relative strength cycle.

MCD Short-Term Chart (2017 – 2020)

The daily view highlights headwinds that are likely to slow the recovery process. A Fibonacci grid stretched across the 2018 into 2019 uptrend places the November low at the .382 rally retracement level, while the gap is sitting at the .50 retracement of the three-month slide. That level marks significant resistance that is likely to trigger whipsaws and reversals before giving way. In turn, that highlights the narrowly aligned 50- and 200-day EMAs at $200, a support level that could eventually offer a low-risk buying opportunity. 

The on-balance volume (OBV) accumulation-distribution indicator failed a breakout above the April 2018 peak in October 2019, while fourth quarter distribution hit the lowest low since March, when the stock traded near $180. OBV has improved since that time, but the volume deficit remains in place, requiring a supply of new investors to reach the prior high. We have to assume that those folks are looking for major improvement from the prior quarter before jumping on board.

The Bottom Line

McDonald's stock may have bottomed, but a profitable position is likely to require patience and a holding period in excess of six months.

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