McDonald's (MCD) Buying Interest Surges to 5-Month High

Dow component McDonald's Corporation (MCD) reports second quarter 2020 earnings in Tuesday's pre-market session, with analysts looking for earnings per share (EPS) of $0.76 on revenue of $3.73 billion. The stock fell nearly 10% in two weeks after the fast food giant missed first quarter profit estimates and reported a 6.2% year-over-year revenue decline in April, and it remains stuck in a persistent trading range about three-quarters of the distance back to February's all-time high.

Key Takeaways

  • McDonald's buying interest has surged in July after a tough second quarter.
  • Wall Street is highly bullish on the long-term outlook, despite pandemic headwinds.
  • A breakout isn't likely until investors can gauge the impact of a second wave in COVID-19 infections.

The slow reopening pace weighed on McDonald's shares in the second quarter, but buying interest has surged in recent weeks, lifting accumulation readings to five-month highs. This looks like a speculative bid, with investors betting that fewer infections in other parts of the world will underpin revenues. Even so, McDonald's owns most of the property sitting under U.S. franchise locations, adding a secondary headwind due to depressed real estate prices in many parts of the country.

Wall Street consensus currently rates shares as a "Strong Buy," underpinned by 20 "Buy" and 4 "Hold" recommendations. No analysts are recommending that shareholders sell their positions at this time. Price targets range from a low of $178 to a Street-high $230, while the stock is trading about $10 below the median $209 target. This placement raises the odds for a buy-the-news reaction if the company meets modest earnings expectations.

Speculation, or speculative trading, refers to the act of conducting a financial transaction that has substantial risk of losing value but also holds the expectation of a significant gain or other major value. With speculation, the risk of loss is more than offset by the possibility of a substantial gain or other recompense.

McDonald's Long-Term Chart (2007 – 2020)

Long-term chart showing the share price performance of McDonald's Corporation (MCD)

The stock broke out above the December 1999 high at $49.56 in 2007 and settled into a volatile trading range on top of new support during the 2008 economic collapse. This resilience underpinned a secondary 2010 breakout that lifted the stock into Dow and market leadership. The uptick ended just above $100 in 2012, giving way to a broad sideways pattern that rebuffed multiple breakout attempts into 2015.

The all-day breakfast initiative triggered a sustained uptrend at that time, carving a well-defined Elliott five-wave rally pattern that ended at an all-time high above $220 in August 2019. The stock pulled back into the $180s in November and posted a lower high in February, ahead of a vertical decline that found support just above the .786 Fibonacci rally retracement level in March.  The monthly stochastic oscillator entered a buy cycle in January, with that bullish influence still in force as we head into the dog days of August.

Elliott Wave Theory was developed by Ralph Nelson Elliott to describe price movements in financial markets, in which he observed and identified recurring, fractal wave patterns. Waves can be identified in stock price movements and in consumer behavior. Investors trying to profit from a market trend could be described as "riding a wave."

McDonald's Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of McDonald's Corporation (MCD)

The on-balance volume (OBV) accumulation-distribution indicator topped out in October 2019 and broke out in February 2020, posting an all-time high. OBV failed the breakout heading into March, dropping into support at the February 2019 low. The bounce into the second quarter stalled in April about half the distance back to the high, while a June breakout attempt failed. Bulls had better luck earlier this month, lifting the indicator to the highest high since March.

The .786 Fibonacci retracement level has aligned with the psychological $200 level, where the stock is trading on Monday morning. A positive earnings reaction should clear that barrier and set the stage for a test at the first quarter high. The trendline of lower highs establishes a resistance zone between $216 and $222 that might not yield until sidelined investors can gauge the impact of a second pandemic wave.

The Bottom Line

McDonald's stock could gain ground after this week's earnings report, but a breakout to new highs is unlikely until we get through the fall and winter of 2020 into 2021.

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

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