Dow component McDonald's Corporation (MCD) is testing November 2018's bull market and all-time high at $191, but weak technicals under the surface raise the odds that breakout buyers will get trapped in a major reversal. As a result, tight stop losses are recommended for those willing to take the risk while everyone else stands aside, letting other traders and investors risk their hard-earned capital.

Buying pressure has failed to match price action in recent months, waving a red flag for the uptick that has now reached resistance at the 2018 high. Price structure isn't cooperating either, carving a four-legged triangle when Elliott Wave Theory expects this common pattern to draw five waves before giving way to a sustained uptrend or downtrend. And most importantly, long-term oscillators have now entered sell cycles that predict relative weakness into the third quarter.

It's also the last week of March and the first quarter, which marks prime time for quarterly window dressing, generated by fund managers buying stocks near highs to polish performance statistics. Mickey D is an obvious candidate for this long-observed phenomenon, undamaged by last year's steep decline and a long-time institutional favorite. However, this phenomenon comes off the table after the first trading day of April as market players turn their attention to earnings season.

MCD Long-Term Chart (1990 – 2019)

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

The stock posted impressive gains between 1990 and 1999, splitting twice during an ascent from the single digits into the upper $40s. The rally stalled in March 1999, yielding a quick pullback, followed by a failed breakout attempt that completed a double top breakdown in February 2000. The subsequent downtrend paused in the mid-$20s in 2001 and resumed one year later, dumping to a 10-year low at $12.12 in 2003.

That marked a historic buying opportunity ahead of a strong recovery wave that completed a round trip into the 1999 high in 2007. The stock broke out immediately, but buying interest failed to develop, yielding a choppy sideways pattern on top of new support. It held that trading floor throughout the 2008 economic collapse, exhibiting unusual strength that contributed to a 2010 breakout and uptrend that ended just above $100 in 2012.

The stock ran in place for the next three years while the Dow Jones Industrial Average gained more than 5,000 points, dropping the fast food giant to the bottom of the performance list. Positive results from the all-day-breakfast initiative then took control, generating an uptrend that carved two pullbacks into November 2018's all-time high at $191. It sold off with broad benchmarks into December, while two-sided action through March 2019 has drawn a symmetrical triangle pattern.

The monthly stochastics oscillator entered a buy cycle in April 2018 and crossed into sell cycle at the overbought level in January 2019. That bearish signal is still in force despite recent gains, predicting that sellers will remain in control through the second quarter. As a result, the minor uptick this month could be setting a bull trap that gets sprung as soon as the rally hits a new high.

MCD Short-Term Chart (2018 – 2019)

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

The stock has been grinding through a symmetrical triangle since breaking out above the January 2018 high in November, telling us that it's still testing new support in the upper $170s. The triangle has carved four waves since creation, failing to reach the typical five waves needed for a breakout or breakdown. In turn, this suggests that the current uptick will fail, yielding a final downdraft that could reach the lower red line at $178.

The on-balance volume (OBV) accumulation-distribution indicator adds to this bearish equation, failing to reach the January high during the fourth quarter breakout. It has posted a series of lower highs in the past four months, indicating aggressive profit taking under the surface, and will set off a major bearish divergence if the stock breaks out in the coming sessions. Taken together with other technical warnings, this suggests that the rally train could easily go off the rails.

The Bottom Line

McDonald's stock has carved a bullish-looking consolidation pattern, but weak technicals under the surface raise the odds for a failed breakout and bull trap.

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