Dow component McDonald's Corporation (MCD) carved a dramatic recovery off March's three-year low, posting an all-time high at $231.91 in October. However, the technical tides are turning once again, raising the odds for a selloff that shaves 15% to 25% off the stock's current value. It looks like many insiders have already taken notice and pulled up stakes, leaving a more complacent retail crowd to deal with the eventual fallout.
- McDonald's stock failed a breakout above the 2019 high in October.
- The stock sold off after third quarter earnings on Nov 9, despite beating top- and bottom-line estimates.
- Technical readings now forecast a decline into the $180s.
The second pandemic wave is contributing to this downturn, with new lockdowns and shutdowns weighing on performance. However, this isn't the first quarter, and fast food aficionados now have more options to indulge in their habits, with ubiquitous drive-through and delivery options. Even so, that hasn't stopped longer-term technical readings from flashing warning signs that could translate into a descent toward $185.
For starters, McDonald's stock failed the breakout above the August 2019 high at $222 at the end of October and then trapped buyers in a 21-point decline after opening higher in reaction to better-than-expected third quarter 2020 earnings on Nov. 9. The good news wasn't so good in this case, with Mickey D. reporting a 1.5% year-over-year revenue decline and a 2.2% drop in global comparable sales. System-wide sales were flat year over year, dropping 1% in constant currencies.
Similar metrics would have generated rallies in the second and third quarters, but the pandemic bid is now getting unwound, due to the proximity of vaccinations, and market players are turning their attention to companies that are producing real year-over-year growth. That might not happen with McDonald's in the next two quarters due to the second wave and the company's heavy international exposure.
Even so, Wall Street consensus remains steadfastly bullish on McDonald's shares, with a "Strong Buy" rating based upon 22 "Buy," 6 "Hold," and no "Sell" recommendations. Price targets currently range from a low of $203 to a Street-high $265, while the stock opened Friday's session just $12 above the low target. This humble placement is typically good news, but the opposite may be true in this case, with analysts failing to keep up with current events.
Comparable store sales refers to the revenue generated by a retail location in the most recent accounting period relative to the revenue it generated in a similar period in the past.
McDonald’s Daily Chart (2018 – 2020)
The stock completed a multi-year Elliott five-wave rally at $222 in August 2019 and turned lower in a correction that initially found support at $188 in November. It broke that trading floor during the first quarter's pandemic decline, dropping to the lowest low since February 2017 before turning higher into the second quarter. Price action completed a 100% retracement into the 2019 high in September and broke out, adding 10 points before turning tail in a failure swing that reinforces range resistance.
Long-term relative strength readings have flipped into sell cycles after the reversal, predicting lower prices into the first quarter of 2021. More importantly, broad price action since August 2019 has carved the potential outline of an inverse head and shoulders pattern. If so, the current pullback will reach the vicinity of the November 2019 low at $188, with an upturn at that level setting the stage for an eventual breakout.
Relative strength is a technique used in momentum investing and identifying value stocks. It consists of investing in securities that have performed well, relative to their market or benchmark. For example, a relative strength investor might select technology companies that have outperformed the Nasdaq Composite Index or large-cap stocks that are laggards against the S&P 500 Index.
The Bottom Line
McDonald's stock could lose ground in coming weeks, dropping into the $180s before finding committed buying interest.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.